Private ruling: Employee Incentive Plans
Published: June 2014
Ruling period: Income tax | Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Fringe benefits tax | Year ended 31 March 2013 | Year ended 31 March 2014 | Year ending 31 March 2015 | Year ending31 March 2016 | Year ending 31 March 2017 | Year ending 31 March 2018
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the company entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable and non-refundable cash contributions made by the company to the trustee of the company's Employee Share Trust (the EST) to fund the subscription for, or acquisition of, the company shares under the Incentive Plans? | A1: Yes. | Q2: Is the company entitled to a deduction under section 8-1 of the ITAA 1997 for expenses incurred in relation to the implementation and on-going administration of the EST? | A2: Yes. | Q3: If the answer to question 1 is yes, does section 83A-210 of the ITAA 1997 operate to delay the company claiming a deduction for the irretrievable and non-refundable cash contributions to the trustee of the EST to satisfy the exercise of 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' until the 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' are acquired by the Participant? | A3: Yes. | Q4: If the answer to question 1 is yes, does former section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) operate to delay the company claiming a deduction for the irretrievable and non-refundable cash contributions to the trustee of the EST to satisfy the exercise of 'Division 13A Share Options' until the relevant 'Division 13A Share Options' are acquired by the Participant? | A4: Yes. | Q5: If the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company, will the subscription proceeds be included in the assessable income of the company under either section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997? | A5: No. | Q6: Will CGT event D1 happen under section 104-35 of the ITAA 1997 or CGT event H2 happen under section 104-155 of the ITAA 1997 if the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company? | A6: No. | Q7: Will the Commissioner make a determination under paragraph 177F(1)(b) of the ITAA 1936 to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936 be obtained, by the company as a result of the scheme? | A7: No. | Q8: Does paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) exclude the provision of Share Options or Rights to Participants under the Incentive Plans from being a fringe benefit? | A8: Yes. | Q9: Do the irretrievable and non-refundable cash contributions made by the company to the trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans represent a fringe benefit as defined under subsection 136(1) of the FBTAA? | A9: No. | Q10: Will the Commissioner make a determination under subsection 67(1) of the FBTAA to increase the aggregate fringe benefits amount of the company by the amount of any tax benefit obtained as a result of the arrangement under which the irretrievable and non-refundable cash contributions were made by the company to the trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans? | A10: No.

Relevant facts and circumstances: Background 1. The company carries on a business. The company's remuneration and incentive programs 2. The objective of the company's employee remuneration framework is to ensure that reward for performance is competitive and appropriate for the results delivered. The framework conforms to market practice and aligns employee rewards with achievement of strategic objectives and the creation of value for shareholders. 3. Specifically, the company's employee remuneration strategy and supporting incentive programs aim to: • ensure remuneration is competitive in the relevant employment market to support the attraction, motivation and retention of employees • align employee remuneration to business outcomes which deliver value to shareholders • drive a high performance culture by setting performance objectives and rewarding high performing individuals, and • comply with all relevant legal requirements and appropriate standards of governance. 4. The company currently operates Incentive Plan 1 and Incentive Plan 2 (referred to collectively as the Incentive Plans). The company envisages the Incentive Plans will continue to be a part of its remuneration strategy for the foreseeable future. 5. A number of interests in the Incentive Plans remain unexercised and / or unvested. The incentive plan obligations, once exercised and/ or vested, will be satisfied through the trustee of the EST. Use of the EST to facilitate Incentive Plans 6. The company believes that the use of an employee share trust by a company provides greater flexibility in managing capital, a streamlined approach (in part through outsourcing) to incentivising employees with shares, and assists companies to satisfy requirements imposed by the Corporations Act 2001 . 7. The commercial benefits of using the EST for the company include providing: • The company with capital management flexibility by being able to direct the trustee of the EST to either buy shares or to subscribe for an issue of new shares in the company (thereby providing flexibility to manage the dilution of existing shareholders if required) • a single vehicle for the administration of the Incentive Plans and any plans which the company introduces in the future, and for the convenient outsourcing of the administration to a third party administrator (the trustee of the EST) who efficiently oversees such Incentive Plans as part of their business. This outsourcing will free up internal resources, and • an arm's length vehicle (through the use of a third party trustee) for acquiring and holding shares in the company. This assists the company in meeting Corporations Law requirements and managing risks associated with dealing in its own shares and potential insider trading issues. 8. Eligibility considerations for Participants include the length of service of the employee to the company and the employee's potential contribution to the growth of the company. Operation of Incentive Plan 1 (IP1) 9. The objectives of IP1 are to establish a method by which eligible persons can participate in the future growth and profitability of the company, to provide an incentive and reward for eligible persons for their contributions to the company, and to attract and retain a high standard of managerial and technical personnel for the benefit of the company. 10. Broadly, IP1 operates as follows: • From time to time, the board shall determine the number of options to be set aside for the purposes of IP1. • An eligible participant is a person who is a full-time or part-time employee of the company, other than such a person who has given notice of resignation, or who has been given notice of termination of his or her employment, or removed from his or her position. • The board may in its absolute discretion determine criteria to apply to an eligible participant for participation in the plan. • Eligibility to participate in the plan does not confer a right to participate in the plan. Participation in the plan will be solely determined by the board in accordance with the rules of IP1. • Options may be granted to eligible participants or their associates as approved by the board from time to time. • The company may from time to time make offers in writing to eligible participants inviting them to accept an offer of options under the plan. • Options must be offered under the plan for no more than nominal consideration, defined to be $0.01. Historically, options have been issued for nil consideration and it is the board's intention to continue issuing options for nil consideration. • Each share option is granted pursuant to the following terms: • Each option entitles the holder to be issued, transferred or allocated one share on exercise of the option. • The exercise price of an option shall be the price determined by the board in its absolute discretion prior to or on grant of the option. • The exercise period of an option shall be the period determined by the board in its absolute discretion prior to, or on grant of the option. If no period is determined by the board then the exercise period shall be the period from the date of grant of the option to the expiry date. • Options may not be exercised during the period of 12 months from and including the date of issue of the option (restricted period). • Options may also be exercised at other times as set out in the rules including: a) during a takeover period b) at any time after a change of control event has occurred, and c) at any time after the announcement of a proposed capital reconstruction as referred to in the rules of IP1. • In the board's absolute discretion, options may also be exercised within 12 months of the event of the death or permanent disablement of an eligible participant, in respect of options held by or on behalf of the eligible participant. • The board may in its absolute discretion impose vesting conditions in respect of an option on such terms as the board considers appropriate. If an option is subject to vesting conditions then the option may only be exercised if the vesting conditions relating to it have been satisfied or waived by the board in its absolute discretion. • On expiry of the exercise period an option not exercised shall automatically lapse. • Where a reorganisation of the issued capital of the company occurs (including consolidation, subdivision, reduction or return), the Share Options are to be reorganised in a manner required by the listing rules and, in any case, in a manner which will not result in any benefits being conferred on holders of options which are not conferred on shareholders. • Options may only be exercised by notice in writing to the company which specifies the number of options being exercised and must be accompanied by payment to the company of the exercise price for the number of options specified. • Shares issued, transferred or allocated pursuant to the exercise of options will be dispatched within ten business days after the holder has validly exercised the options. • All shares issued, transferred and/ or allocated upon exercise of the options will be credited as fully paid and will be of the same class and rank equally in all respects with other shares. All shares issued will be 'equity interests' for the purposes of Subdivision 974-C of the ITAA 1997. • Generally, options will automatically lapse and be forfeited if the Participant to whom the options were first granted voluntarily resigns, is dismissed from employment or removed from his or her position during the restricted period. • Where a Participant voluntarily resigns, the board may, in its absolute discretion, determine that the Participant may exercise options granted to that Participant within ten business days after such resignation. • In certain circumstances as set out in the rules, options will not lapse and be forfeited if the Participant ceases employment or is removed from his or her position. The discretion will not be exercised on a routine basis to allow Participants voluntarily ceasing employment to receive their unvested options. • Where the trustee of the EST holds shares on behalf of a Participant: • The dividends payable on those shares will be paid by the company to the trustee of the EST, and the trustee of the EST will then pay any such dividends to the Participant. • The Participant may direct the trustee of the EST by notice in writing how to exercise voting rights attaching to those shares, and in the absence of such direction, the trustee of the EST must not exercise those voting rights. • The company, or the trustee of the EST (if so directed by the directors), must forward to a Participant a copy of any notices of meetings of the company. • Within ten business days after delivery of the exercise notice and exercise price, the company must instruct the trustee of the EST to subscribe for, acquire and/ or allocate the relevant number of shares specified, and the trustee of the EST will hold those shares on behalf of the Participant in accordance with the terms of the trust deed. • Subject to the trustee of the EST receiving from the company sufficient funds to acquire the shares, the board may, in its absolute discretion, instruct the trustee of the EST to subscribe for new shares or acquire shares to be held on a Participants' behalf, or instruct the trustee of the EST to use a combination of both alternatives. • A Participant may submit a withdrawal notice to the company in respect of some or all of the shares the EST holds on behalf of the Participant. The board may approve the withdrawal from the trust of all or a specified number of shares held by the trustee of the EST on behalf of the Participant. The board must not unreasonably withhold their approval of the withdrawal. Operation of the Incentive Plan 2 (IP2) 11. IP2 was established on, or after 1 July 2009. 12. The purpose of IP2 is to align employee compensation with returns to shareholders and assist with staff retention. It is targeted at the company employees whose responsibilities provide them with the opportunity to significantly influence long-term shareholder value. The vesting of the Rights is subject to satisfaction of performance objectives that have been developed to create a link to shareholder value. 13. Broadly, IP2 operates as follows: • Responsibility for the establishment and operation of IP2 rests with the board of directors of the company. • IP2 operates on the basis of an annual cycle, correlated to the company's financial year. At, or prior to, the commencement of a financial year, selected employees will be provided with a potential entitlement, being an amount expressed in Australian dollars, which will be used to determine the number of Rights issued and the relevant targets. • Rights represent a right, subject to vesting, to be issued, transferred or allocated a number of fully paid shares in the company. Rights are granted for nil consideration, unless otherwise stated by the board. • Upon the vesting of a performance right: • the board must instruct the trustee of the EST to subscribe for, acquire and / or allocate the number of shares in respect of which the Participant was entitled, on behalf of the Participant in accordance with the terms of the trust deed • the company, or the trustee of the EST (by instruction from the company), must notify the Participant that the trustee of the EST holds the shares on the Participants' behalf, and • there is no exercise price to be paid by the Participant in relation to the rights. Once the Rights have vested, the Participant becomes entitled to receive the specified number of shares. • All shares issued, transferred and / or allocated upon vesting of the Rights will rank pari passu in all respects with shares then on issue. All shares issued will be 'equity interests' for the purposes of Subdivision 974-C of the ITAA 1997. • If a Participant ceases employment with the company and at the cessation date of employment has any Rights which remain unvested, those unvested Rights will automatically lapse, subject to the overriding discretion of the board. The discretion of the board will not be exercised on a routine basis to allow Participants voluntarily ceasing employment to receive their unvested Rights. • A Participant may submit a withdrawal notice to the company in respect of some or all of the shares the trustee of the EST holds on behalf of the employee. At this point, if the board approves the withdrawal notice, the company must direct the trustee of the EST to transfer legal title of the shares to the Participant in accordance with the terms of the approved withdrawal notice. • Rights granted to a Participant under IP2 may not be transferred, mortgaged, charged or otherwise dealt with by a Participant, other than in accordance with the terms of IP2, and will lapse immediately if dealt with in such a way. • Subject to applicable laws, in the event of any reorganisation (including consolidation, subdivision, reduction or return) of the issued capital of the company, the number of Rights a Participant has, may be adjusted by the board on any basis in its absolute discretion to ensure no advantage or disadvantage accrues to Participants. • Where the trustee of the EST holds shares on behalf of a Participant: • the dividends payable on those shares will be paid by the company to the trustee of the EST, and the trustee of the EST will then pay any such dividend to the Participant • the Participant may direct the trustee of the EST by notice in writing how to exercise voting rights attaching to those shares, and in the absence of such a discretion, the trustee of the EST must not exercise those voting rights, and • the company or the trustee of the EST (if so directed by the board) must forward to a Participant a copy of any notices of meetings of the company. • Where a change of control event occurs, any Rights that have been earned but remain unvested, will vest automatically. The EST 14. The trustee of the EST is a resident of Australia for tax purposes. 15. The trustee of the EST is independent from the company and is under a fiduciary duty to act in the interests of the Participants. 16. The EST Trust Deed states that the company: Wishes to establish a trust for the sole purpose of obtaining Shares for the benefit of Participants, including subscribing for or acquiring, allocating, holding, and delivering Shares under the Incentive Plans and other employee equity plans for the benefit of Participants. 17. The EST is intended to operate as follows: • The EST is being established solely for the purpose of obtaining securities for the benefit of employees, including accepting the grant of, subscribing for, acquiring, holding, allocating and delivering employee shares under the company's Incentive Plans. • The EST will be funded by contributions from the company (that is, for the purchase of shares in accordance with the Incentive Plans) as specified in the trust deed. In accordance with the intended operation of the Incentive Plans, contributions are likely to occur subsequent to the Participant's valid request to exercise their Share Options or the vesting of Rights. • These funds will be used by the trustee of the EST to acquire shares in the company based on notification from the company. • Shares acquired by the trustee of the EST will be immediately allocated to the relevant employees and held on trust on their behalf. It is not the intention of the company to warehouse the shares for long periods of time. • The structure of the EST and the Incentive Plans are such that shares may be dealt with at any time after the restriction period lapses, in the following manner: • shares allocated to each employee will generally be transferred into the name of the employee (that is, legal title) upon a withdrawal notice being lodged with, and approved by the board, or • the trustee of the EST can sell shares on behalf of the employee, where permitted to do so by the employee, resulting in a cashless exercise for them. That is, the employee receives proceeds on sale of the shares by the EST. • the trustee of the EST is an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the terms of the trust deed. The company will pay the trustee of the EST's costs of operation to the extent they relate to the operation of the EST which will facilitate the company's Incentive Plans. 18. The contributions made by the company to the trustee of the EST are irretrievable and non-refundable in that the trustee of the EST must use them exclusively to purchase shares in the company for Participants. The shares then form part of the assets of the EST. To facilitate the contributions, funds will flow from the bank account of the company into the bank account of the trustee of the EST. The trustee of the EST will diminish each contribution through the direct provision of remuneration to employees within five years of receiving the contribution. 19. The contributions can only be used to acquire shares on behalf of the Participants. 20. The company will fund the EST on an ongoing (at least annual) basis as needed. 21. The amount of contribution made to the trustee of the EST by the company will equal the fair market value of the shares to be acquired for employees. 22. The company has no beneficial interest in the EST. 23. The company has incurred and will continue to incur costs in relation to the implementation and on-going administration of the EST associated with services provided by the trustee of the EST. 24. The Trust Deed limits the activities of the trustee of the EST to those that are 'necessary or expedient' to administer and maintain the Trust and the Trust Assets. 25. The Trust Deed states that all funds received by the trustee of the EST 'will constitute Accretions to the corpus of the Trust and will not be repaid to the company and no Participant shall be entitled to receive such funds'. 26. The company does not intend for the trustee of the EST to hold more shares than are required to settle obligations arising in the future from Share Options or Rights. Any shares held by the trustee of the EST in excess of these obligations will not be held for more than one year. 27. The trustee of the EST holds all the company shares pursuant to the Incentive Plans on capital account. 28. The trustee of the EST will not price hedge when purchasing shares or buy shares in advance of the issue of a share option or performance right. Share Options and Rights currently held by the trustee of the EST 29. The company issued a number of Share Options under IP1 prior to 1 July 2009. A number of these options have vested but have not been exercised. When they are exercised, shares will be issued by the company or purchased for Participants through the EST. 30. Share Options were issued to Participants under IP1 prior to 1 July 2009 where the Participant has not made an election under section 139E of the ITAA 1936 and the cessation time referred to in subsection 139B(3) of the ITAA 1936 has not occurred prior to 1 July 2009. These Share Options are referred to as 'Pre 1 July 2009 Division 83A Share Options'. 31. Share options and Rights issued after 1 July 2009 are referred to as 'Division 83A Share Options'. 32. Share options issued to Participants under IP1 prior to 1 July 2009 where the Participant has made an election under section 139E of the ITAA 1936 are referred to as 'Division 13A Share Options'. 33. Share Options issued prior to 1 July 2009 were 'qualifying rights' as defined in former section 139CD of the ITAA 1936. 34. Share Options and Participation Rights are acquired for the purposes of Division 83A of the ITAA 1997 and former Division 13A of the ITAA 1936 by the relevant Participant on the date that they were issued to that Participant by the company. 35. The Share Options and Rights are provided to Participants at a discount for the purposes of subsection 83A-20(1) of the ITAA 1997. Assumptions 1. The cost base of the shares in the hands of the trustee of the EST under Division 110 of the ITAA 1997 will equal the amount of the cash contributions utilised by the trustee of the EST to acquire the shares (that is, the market value of the share on the date of acquisition of the share by the trustee of the EST). For the purposes of subsection 130-90(2) of the ITAA 1997, Participants do not acquire the beneficial interest in the share for more than its cost base in the hands of the EST at the time any relevant CGT event E5 or CGT event E7 happens. 2. The Scheme will be carried out in accordance with the terms of the Incentive Plans and the Trust Deed.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 139DB | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 paragraph 177F(1)(b) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 104-35 | Income Tax Assessment Act 1997 section 104-155 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 (positive limbs) is a general deduction provision. It states that: 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. Subsection 8-1(2) of the ITAA 1997 (negative limbs) then states: 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. | Detailed Reasoning - Positive limbs: Draft Taxation Ruing TR 2014/D1 provides the Commissioner's preliminary view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT). Paragraph 9 of TR 2014/D1 states that the essential elements of an ERT to which the draft ruling applies when considering the consequences for the employer and trustee are: a) an employer carries on business for the purpose of gaining or producing assessable income; b) employees are employed by the employer in the ordinary course of carrying on that business; c) a trust is established by or at the instruction of the employer; d) the trust is a resident trust for the purposes of Division 6; e) the employer makes one or more contributions to the trustee of the trust; f) the trustee applies the contributions to make loans to employees and/or to acquire shares or other assets; employees of the employer are capable of benefiting under the trust (for example, in the form of loans, distributions of cash and/or a transfer of assets); and g) the value of any benefits provided to employees is determined by the employer or the trustee, having regard to the performance of the employees; the growth in value of, or generation of income from, investments held by the trustee; and/or objective indices, for example, movements in the value of shares in the employer or a related entity. 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 a contribution will satisfy the nexus of being necessarily incurred in carrying on a business where: • an employer carries on a business for the purpose of gaining or producing assessable income • engages employees in the ordinary course of carrying on that business • makes a contribution to the trustee of an employee remuneration trust, 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, to the direct provision of remuneration of employees (who are employed in 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 of the ITAA 1997 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. The EST was established with the sole purpose of facilitating the acquisition of shares in the company by Participants (all of whom are employees of the company) under the Incentive Plans which are designed and implemented to reward the performance of those employees in contributing to the company achieving its commercial goals. To facilitate this, the company grant Share Options or Rights to eligible Participants in the Incentive Plans which are held by that Participant until vesting conditions are satisfied. Once vesting conditions are satisfied the Participant may exercise the Share Options, or alternately, the Share Option is allowed to lapse. Once Rights have vested, the company must facilitate the Trust acquiring the relevant number of shares on behalf of the Participant. When a Participant provides notice to the company that they wish to exercise their Share Options, or Rights have vested, the company contributes funds to enable the EST to fulfil the obligation to provide shares in the company to Participants. The trustee of the EST, having acquired sufficient shares to fulfil the obligations through subscription or acquisition, then allocates shares to the relevant Participants to satisfy the exercise of their Share Options or Rights. Each contribution received by the trustee of the EST will be diminished to provide direct remuneration to Participants within five years of the company contributing the funds to the EST, satisfying the time frames required to be considered a relatively short period of time for the contributions to be applied to the direct remuneration of employees. Paragraph 169 of the explanation to TR 2014/D1 provides that a contribution made to the trustee of an ERT is incurred only when the ownership of that contribution passes from an employer to the trustee of the ERT and there is no circumstance in which the employer can retrieve any of the contribution ( Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210) and Spotlight Stores Pty Ltd & Anor v. Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; (2004) 55 ATR 745). In accordance with the trust deed, the contributions made to the EST by the company are irretrievable and non-refundable cash contributions. Once these funds are paid to the trustee of the EST, the company has no further beneficial interest in the funds. Thus, it is accepted that the company incurs an expense at the time irretrievable and non-refundable contributions are made to the EST. Thus, where the company: • carries on its business for the purpose of gaining or producing assessable income • engages the employees for the benefit of which it makes the contributions to the EST in carrying on its business, and • at the time the contributions are made, it is intended that they will be applied within a relatively short time frame to procure shares for the benefit of those employees, then, such a contribution would satisfy the necessary nexus between the incurred expenditure and the carrying on of the company's income producing activities under subsection 8-1(1) of the ITAA 1997. | Detailed Reasoning - Negative limbs: A contribution that is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income will not be deductible to an employer to the extent to which it is capital or of a capital nature. Paragraphs 17 to 21 of TR 2014/D1 consider whether a contribution to an ERT is capital or of a capital nature: 17. A contribution by an employer to the trustee of an ERT is considered to be capital or of a capital nature in whole or in part where the contribution is made for a purpose of securing a capital advantage by way of being ultimately and in substance, applied by the trustee to acquire a direct interest in the employer (for example shares) (a 'capital structure advantage'). 18. A contribution by an employer to the trustee of an ERT in part made for a purpose of securing a capital advantage is only deductible under section 8-1 of the ITAA 1997 to the extent that the contribution is incurred for the primary purpose of being applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in the ordinary course of their employer's business carried on for the purpose of gaining or producing assessable income). ……….. 20. Where the contribution is made in part for securing a capital advantage referred to in paragraph 17, but the capital advantage is only expected to be very small or trifling compared to the advantage expected to be secured by directly remunerating employees (employed in the ordinary course of the employer's income producing business) within a relatively short period of time, it may be fair and reasonable for no part of the contribution to be apportioned to that capital advantage. 21. A capital advantage referred to in paragraph 17 will be accepted as only being very small or trifling where, the primary purpose of the employer in making the contribution is to remunerate its employees (employed in the ordinary course of the employer's income producing business) within a relatively short period of time and the capital advantage is a capital structure advantage where any direct interest in the employer acquired by the trustee of the ERT (for example shares) will be transferred to those employees within a relatively short period of the contribution being made, with the expectation of not being immediately disposed of. The irretrievable and non-refundable contributions made to the trustee of the EST by the company are made for the purpose of the trustee of the EST acquiring shares in the company, thus constituting a capital advantage. However, the primary benefit and purpose for the company of making the contributions is to remunerate employees for their performance in contributing to the ordinary activities of the company. Further, the provision of shares in the company to employees as a result of the company making the contributions aligns the future financial benefits of the Participants from ownership of the shares with benefits accrued by shareholders in the company, thus motivating employees to continue to contribute to the ordinary business goals of the company going forward. As discussed above, after the vesting conditions are satisfied, the company will make contributions to the trustee of the EST and the trustee of the EST will use the funds to acquire the company shares within a relatively short period of time of receiving the contributions. The shares, once acquired by the trustee of the EST, are allocated to the relevant account of each Participant in the EST within a relatively short time frame of receiving the contribution from the company. The Participants are beneficially entitled to the shares in all respects, and are effectively able to attain legal ownership of the shares from the EST at any time following the allocation of the shares by the trustee of the EST by lodging a withdrawal notice to the company. The withdrawal of shares is subject to the approval of the company's board. Whilst it is considered that the contribution is made in part for securing a capital advantage, the capital advantage attained will be small or trifling compared to the advantage expected to be secured by rewarding and motivating the Participants to contribute through their employment performance to the income producing activities of the company. The irretrievable and non-refundable contributions made by the company to the trustee of the EST for the purposes of procuring shares to satisfy the company's commitments arising under the Incentive Plans are primarily outgoings incurred by the company in the ordinary course of carrying on its business. Such contributions are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. The irretrievable and non-refundable contributions are not private or domestic in nature. The irretrievable and non-refundable contributions have not been incurred by the company in producing exempt, or non-assessable non-exempt income. Nothing in the facts suggests that the irretrievable and non-refundable contributions are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or the ITAA 1997. | Detailed Reasoning - Conclusion: Contributions made by the company to the trustee of the EST to acquire shares under the Incentive Plans form part of the remuneration package of the company employees. These contributions are irretrievable and non-refundable and necessarily incurred in carrying on the business of the company. They are not of capital or a capital nature, nor is there anything to indicate that they are otherwise excluded by subsection 8-1(2) of the ITAA 1997. Accordingly, the irretrievable and non-refundable cash contributions made by the company to the trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Is the company entitled to a deduction under section 8-1 of the ITAA 1997 for expenses incurred in relation to the implementation and on-going administration of the EST? | Detailed Reasoning - Detailed reasoning: As discussed in question 1 above, subject to the negative limbs, subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. The company will incur costs associated with the implementation and on-going administration of the EST. These costs incurred by the company to facilitate the implementation and on-going administration of the EST represent ordinary employee remuneration costs of the company incurred in gaining or producing its assessable income. Therefore, subsection 8-1(1) of the ITAA 1997 is satisfied. Also discussed in question 1 above, subsection 8-1(2) of the ITAA 1997 provides that you cannot deduct a loss or outgoing under section 8-1 of the ITAA 1997 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. 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; [1938] HCA 73: 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... The character of the advantage sought when incurring the on-going administration costs is to reward employees of the company for past performance and motivate future performance in contributing to the profitability of the company on an on-going basis. This is not indicative of the expenses being of capital, or capital in nature. The costs incurred are not private or domestic nature. The costs incurred have not been incurred by the company in producing exempt, or non-assessable non-exempt income. Nothing in the facts suggests that the costs incurred are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or the ITAA 1997. ATO Interpretative Decision ATO ID 2002/961 considers the deductibility under section 8-1 of the ITAA 1997 of costs incurred by an employer for the purpose of administering its ESS. It was decided in that ATO ID that the costs of operating the scheme including brokerage fees, audit fees, bank charges and other ongoing administrative expenses were deductible to the employer under section 8-1 of the ITAA 1997. | Detailed Reasoning - Conclusion: The company will incur costs associated with the on-going administration of the EST. These costs are part of the ordinary recurring cost to the company of remunerating its employees. As the costs incurred by the employer for the purposes of administering its ESS in ATO ID 2002/961 are akin to the costs incurred by the company for the implementation and on-going administration of the EST, those costs incurred by the company are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3: If the answer to question 1 is yes, does section 83A-210 of the ITAA 1997 operate to delay the company claiming a deduction for the irretrievable and non-refundable cash contributions to the trustee of the EST to satisfy the exercise of 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' until the 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' are acquired by the Participant? | Detailed Reasoning - Detailed reasoning: As explained in question 1, the provision of money to the trustee of the EST by the company for the purpose of remunerating its employees under the ESS is an outgoing in carrying on the business of the company and deductible under section 8-1 of the ITAA 1997. The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction for employee share schemes is specifically determined under section 83A-210 of the ITAA 1997. The following considers whether the 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' are subject to Division 83A of the ITAA 1997. 'Division 83A Share Options' Subsection 83A-5(1) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that Division 83A of the ITAA 1997 applies in relation to an ESS interest if: a) the interest was acquired on or after 1 July 2009; and b) the relevant share or right (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936, as in force at the time (the pre-Division 83A time) occurring just before Schedule 1 to the Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 commenced, (former Division 13A)) was not acquired (within the meaning of former Division 13A) before 1 July 2009. Subsection 995-1(1) of the ITAA 1997 provides that an ESS interest in a company has the meaning given by subsection 83A-10(1) of the ITAA 1997. An ESS interest in a company, is 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. Subsection 995-1(1) of the ITAA 1997 defines a share in a company to mean a share in the capital of the company, and includes stock. The Share Options and Rights represent a right to acquire a beneficial interest in a share in the company, and subsequently represent an ESS interest for the purposes of subsection 83A-10(1) of the ITAA 1997. Under the Incentive Plans, the Participants were issued Share Options or Rights on, or after 1 July 2009. The Participants acquire these Share Options and Rights at that time when they are issued by the company. The 'Division 83A Share Options' were issued to Participants on or after 1 July 2009, therefore satisfying both paragraphs 83A-5(1)(a) and 83A-5(1)(b) of the ITTPA 1997. Consequently, Division 83A of the ITAA 1997 applies in relation to those ESS interests. 'Pre 1 July 2009 Division 83A Share Options' Paragraph 83A-5(2)(a) of the ITTPA 1997 also provides that Subdivision 83A-C of the ITAA 1997 (and the rest of Division 83A of that Act, to the extent that it relates to that Subdivision) also applies in relation to an ESS interest if all of the following apply: (i) at the pre-Division 83A time, subsection 139B(3) of the Income Tax Assessment Act 1936 applied in relation to the interest (ii) the interest was acquired (within the meaning of former Division 13A) before 1 July 2009, and (iii) the cessation time mentioned in subsection 139B(3) of the Income Tax Assessment Act 1936 , as in force at the pre-Division 83A time, for the interest did not occur before 1 July 2009. Former subsection 139B(3) of the ITAA 1936 provided that if the share or right is a qualifying share or right and the taxpayer has not made an election under former section 139E of the ITAA 1936 covering the share or right, the discount is included in the taxpayer's assessable income of the year of income in which the cessation time occurs. Therefore, former subsection 139B(3) applies to a qualifying right in relation to which a taxpayer had not made an election under former section 139E covering that right. The definition of a qualifying right was provided by former section 139CD of the ITAA 1936. In the present context, all Share Options issued prior to 1 July 2009 were 'qualifying rights' for the purposes of former section 139CD of the ITAA 1936. Further, the Participant had not made an election under former section 139E of the ITAA 1936 in relation to 'Pre 1 July Division 83A Share Options'. 'Pre 1 July Division 83A Share Options' were issued prior to 1 July 2009. As such, subparagraph 83A-5(2)(a)(i) of the ITTPA 1997 is satisfied. The Share Options were acquired, for the purposes of former Division 13A of the ITAA 1936, when the company issued the Share Options to the Participant. Given that the 'Pre 1 July 2009 Division 83A Share Options' were issued to Participants by the company prior to 1 July 2009 they are taken to be acquired before 1 July 2009 and subsequently satisfy subparagraph 83A-5(2)(a)(ii) of the ITTPA 1997. The cessation time referred to in former subsection 139B(3) of the ITAA 1936 did not happen before 1 July 2009 in relation to the 'Pre 1 July 2009 Division 83A Share Options'. Consequently, subparagraph 83A-5(2)(a)(iii) of the ITTPA 1997 is satisfied. The 'Pre 1 July 2009 Division 83A Share Options' satisfy paragraph 83A-5(2)(a) of the ITTPA 1997 and are subject to Division 83A of the ITAA 1997. In summary, all 'Division 83A Share Options' and 'Pre 1 July Division 83A Share Options' are subject to Division 83A of the ITAA 1997 as they satisfy either subsection 83A-5(1) or paragraph 83A-5(2)(a) of the ITTPA 1997. Application of Division 83A of the ITAA 1997 Section 83A-210 of the ITAA 1997 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 purposes 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 purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. The term 'arrangement' is defined by subsection 995-1(1) of the ITAA 1997 as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. Under the Incentive Plans, the company will contribute money to the trustee of the EST. The implementation of the Incentive Plans undertaken by the company satisfies the definition of an arrangement. This satisfies paragraph 83A-210(a)(i) of the ITAA 1997. ATO Interpretative Decision ATO ID 2010/103 considers the timing of deductions for money provided to the trustee of an employee share trust. The ATO ID states that section 83A-210 of the ITAA 1997 applies to determine the timing of the deduction, but only in respect of the amount of money provided to the trust to purchase shares in excess of the number required to meet obligations arising in the year of income from the grant of options, under an employee share scheme. Section 83A-210 of the ITAA 1997 will only apply 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 an employee share scheme in relation to the employee's employment. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Subsection 83A-10(2) of the ITAA 1997 defines an 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 either the company; or subsidiaries of the company, in relation to the employees' employment. An option granted to an employee under the scheme will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the option to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme. The granting of the beneficial interests in the options, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All of the components of the scheme must be carried out so that the scheme can operate as intended. The provision of money to the trustee (as one of those components), necessarily allows the scheme to proceed. Consequently, the provision of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the options. A deduction for the purchase of shares to satisfy the obligation arising from the grant of options is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. The Share Options and Rights granted to Participants are ESS interests. The subsequent acquisition and holding of shares by the trustee of the EST are considered to be under the same scheme. However, if an amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of options, the excess payment therefore occurs before the employees acquire the relevant options under the scheme. Section 83A-210 of the ITAA 1997 will apply and the excess payment will only be deductible to the employer in the year of income when the relevant options are subsequently granted to the employees. Thus, a deduction under section 8-1 of the ITAA 1997 for contributions to an employee share trust is only available once an employee has acquired a beneficial interest in an option or share in the company. The money contributed to the trustee of the EST by the company is provided to enable the relevant Participants (who are employees or former employees of the company) to have shares acquired on their behalf in satisfaction of Share Options or Rights, which represent ESS interests. Following the acquisition of the shares by the trustee of the EST, the shares in the company will be held on trust for the relevant Participant who will have a beneficial entitlement to those shares. This satisfies subparagraph 83A-210(a)(ii) of the ITAA 1997. As such, the contributions are provided to enable the ESS interests to be acquired under an ESS in relation to the Participants employment. However, in some instances, the company will contribute funds to the trustee of the EST before the Participant has acquired the Share Options or Rights. In these circumstances, the Participant is not considered to have acquired an ESS interest until the particular time at which they acquire the Share Options or Rights. Consequently, the contribution of funds to the trustee of the EST occurs before the ultimate beneficiary acquires the ESS interest and section 83A-210(b) of the ITAA 1997 is satisfied. Given that subsections 83A-210(a) and 83A-210 (b) of the ITAA 1997 are satisfied, then where contributions of money by the company to the trustee of the EST to satisfy the exercise of Share Options or Rights are made: • in income years prior to the income year in which the Participants acquires the relevant Share Options or Rights, section 83A-210 of the ITAA 1997 will operate to delay the deduction under section 8-1 of the ITAA 1997 to the income year in which the Participant acquires the Share Option or Performance Right, or • in the same income year in which the Participants acquire the relevant Share Options or Rights, the deduction under section 8-1 of the ITAA 1997 will be available in that income year. | Detailed Reasoning - Conclusion: Section 83A-210 of the ITAA 1997 will operate in circumstances where a contribution is made prior to the provision of a relevant ESS interest. In this circumstance it will operate to delay any deductions under section 8-1 of the ITAA 1997 available to the company for contributions made to satisfy the exercise of 'Division 83A Share Options' and 'Pre 1 July 2009 Division 83A Share Options' until the income year in which the relevant Participant acquires the relevant Share Options or Rights under the Incentive Plans. | Detailed Reasoning - Question 4: If the answer to question 1 is yes, does former section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) operate to delay the company claiming a deduction for the irretrievable and non-refundable cash contributions to the trustee of the EST to satisfy the exercise of 'Division 13A Share Options' until the relevant 'Division 13A Share Options' are acquired by the Participant? | Detailed Reasoning - Detailed reasoning: Subsection 83A-10(1) of the ITTPA 1997 outlines the circumstances in which former Division 13A of the ITAA 1936 will continue to apply to a share or a right in spite of the repeal of the Division. Subparagraph 83A-10(1)(a)(i) of the ITTPA 1997 provides that subsection 83A-10(1) of the ITTPA 1997 applies where, just before 1 July 2009, Division 13A of Part III of the ITAA 1936, as in force at that time, applied in relation to a share or right (within the meaning of former Division 13A of the ITAA 1936). Former Division 13A of the ITAA 1936 includes section 139DB. Former section 139DB of the ITAA 1936 provides that: if, at a particular time, a person (the provider) provides another person with money or other property: (a) under an arrangement; and (b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme; then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right. During the relevant period, subsection 6(1) of the ITAA 1936 provided that the term 'person' includes a company. Under IP1, the company will contribute money to the trustee of the EST. The implementation of IP1 by the company satisfies the definition of an arrangement and consequently satisfies former paragraph 139DB(a) of the ITAA 1936. ATO Interpretative Decision ATO ID 2005/181 considers the deductibility of money provided by a company to the trustee of an employee share trust. Whilst ATO ID 2005/181 has been withdrawn, it continues to reflect the Commissioner's view for income years up to and including the year ending 30 June 2009 on issues considered in that ATO ID. ATO ID 2005/181 provides that section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 in respect of the provision of money to the trustee of an employee share trust to purchase shares to satisfy obligations arising from share rights. The reasons for decision for ATO ID 2005/181 state the following: Subsection 139C(4) of the ITAA 1936 provides that a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme. By the operation of subsection 139C(4) of the ITAA 1936 the shares transferred when the vesting conditions have been satisfied are not acquired by the participating employees under an employee share scheme. Therefore, section 139DB of the ITAA 1936 will only apply if there is the relevant connection between the money provided by the taxpayer to the trustee under the arrangement and the acquisition of the rights by the participating employees (the ultimate beneficiaries) under the plan. The granting of the rights, the providing of the money to the trustee, the acquisition and holding of the shares by the trustee and the allocating of shares to the participating employees are all interrelated components of the plan. All the components of the plan must be carried out so that the plan can operate as intended. As one of those components, the providing of money to the trustee necessarily allows the plan to proceed. Consequently, the providing of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the plan, to acquire the rights available under the plan. Accordingly, section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the taxpayer under section 8-1 of the ITAA 1997 in respect of the provision of money to the trustee of the employee share trust. Therefore, pursuant to section 139DB of the ITAA 1936, a deduction is allowable at the time the rights are acquired by participating employees and only to the extent of that amount of the money provided to acquire shares to satisfy the obligations in relation to the rights acquired. In accordance with ATO ID 2005/181, the amounts contributed to the trustee of the EST to satisfy the exercise of 'Division 13A Share Options' by the trustee of the EST on behalf of relevant Participants under IP1 is necessary to enable IP1 to proceed. As such, the contributions are considered to be for the purpose of enabling the participating employees, indirectly as part of the plan, to acquire the rights available under the plan. This satisfies former paragraph 139DB(b) of the ITAA 1936. Given that both conditions in former section 139DB of the ITAA 1936 are satisfied, that section is taken to have applied to the 'Division 13A Share Options' just before 1 July 2009. Consequently, former Division 13A of Part III of the ITAA 1936, as in force at that time, applied in relation to those share and rights, meaning that subparagraph 83A-10(1)(a)(i) of the ITTPA 1997 is satisfied. Subsection 83A-10(2) of the ITTPA 1997 provides that if subparagraph 83A-10(1)(a)(i) of the ITTPA 1997 applies in relation to a share or right, then former Division 13A of the ITAA 1936 continues to apply (in spite of its repeal) to the share or right. Consequently, former Division 13A of the ITAA 1936 continues to apply (in spite of its repeal) to the 'Division 13A Share Options'. Given that former section 139DB of the ITAA 1936 as part of former Division 13A of the ITAA 1936 continues to apply, then for the purpose of determining when any deduction is allowable to the company in respect of contributions to the trustee of the EST to allow the trustee of the EST to facilitate the exercise of the 'Division 13A Share Options' under IP1, the company is taken to have provided the contributions not before the time when the relevant Participant acquires the 'Division 13A Share Options'. In relation to the 'Division 13A Share Options' as discussed in question 3 above, had the Participants not made an election under section 139E of the ITAA 1936 then paragraph 83A-5(2)(a) of the ITTPA 1997 may have applied to make Division 83A of the ITAA 1997 the relevant legislation in determining the timing of deductions for the company in relation to contributions made to the trustee of the EST to facilitate the exercise of the 'Division 13A Share Options' by Participants. However, given that Participants have made an election under section 139E of the ITAA 1997 in relation to the 'Division 13A Share Options', paragraph 83A-5(2)(a) of the ITTPA 1997 will not apply. | Detailed Reasoning - Conclusion: As a result of the application of former section 139DB of the ITAA 1936, the company is only entitled to deduct amounts contributed to the trustee of the EST to satisfy the exercise of 'Division 13A Share Options' when the relevant 'Division 13A Share Options' are acquired by the relevant Participant. | Detailed Reasoning - Question 5: If the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company, will the subscription proceeds be included in the assessable income of the company under either section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997? | Detailed Reasoning - Ordinary Income: Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. Jordan CJ in Scott v. Commissioner of Taxation (1935) 35 SR (NSW) 215 stated that: 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. In Eisner v Macomber 252 US 189 (1919) it was stated 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 GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (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 and further stated 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 derived in carrying on a business. ATO Interpretative Decision ATO ID 2010/155 considers the assessability of the option exercise price paid directly to the employer by the employee as ordinary income. Whilst not directly on point, the ATOID also discusses the subscription price for shares acquired under an employee share scheme. ATO ID 2010/155 states that where the trustee subscribes for the issue of shares using the funds provided by the employer, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee. The subscription price received by the company from the trustee is a capital receipt of the company. The character of the proceeds received by the company from the trustee of the EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the company is issuing the trustee of the EST with new shares in itself. The character of the newly issued shares is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and is also of a capital nature. Accordingly, when the company receives proceeds from the trustee of the EST as subscriptions for new shares in the company to satisfy obligations to Participants, the subscription price received by the company is a capital receipt. That is, it will not be on revenue account, and will not be ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Section 20-20 of the ITAA 1997: Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing: n it will be assessable income if you received it by way of insurance or indemnity, and n that amount can be deducted as a loss or outgoing in the current year or earlier income year. | Detailed Reasoning - Insurance or indemnity: The company will receive an amount for the subscription of shares by the trustee of the EST. There is no insurance contract so the amount is not received by way of insurance. The amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Therefore it cannot be said that the subscription proceeds are by way of insurance or indemnity under subsection 20-20(2) of the ITAA 1997. Recoupment of a loss or outgoing Subsection 20-20(3) of the ITAA 1997 makes an amount received for the recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year (where the deduction was claimed under a provision listed in section 20-30 of the ITAA 1997), an assessable recoupment. The ordinary meaning of recoupment is extended by subsection 20-25(1) of the ITAA 1997 to include: (a) any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and (b) a grant in respect of a loss or outgoing. However, none of the provisions listed in section 20-30 of the ITAA 1997 are relevant to the current circumstances. As the subscription proceeds are not a recoupment, as defined in subsection 20-25(1) of the ITAA 1997, the proceeds will not be an assessable recoupment under subsection 20-20(3) of the ITAA 1997. The amounts received by the company for subscription of shares under the Incentive Plans by the trustee of the EST do not constitute an insurance or indemnity for the purposes of subsection 20-20(2) of the ITAA 1997, nor a recoupment for the purposes of subsection 20-20(3) of the ITAA 1997. Therefore, the amounts are not an assessable recoupment for the purposes of section 20-20 of the ITAA 1997. | Detailed Reasoning - Conclusion: The subscription proceeds will not be included in the assessable income of the company under either section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997. | Detailed Reasoning - Question 6: Will CGT event D1 happen under section 104-35 of the ITAA 1997 or CGT event H2 happen under section 104-155 of the ITAA 1997 if the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company? | Detailed Reasoning - Detailed Reasoning: CGT event D1 Subsection 104-35(1) of the ITAA 1997 provides that CGT event D1 happens if you create a contractual or other legal or equitable right in another entity. However, paragraph 104-35(5)(c) provides that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. An 'equity interest' in a company has the meaning given by Subdivision 974-C of the ITAA 1997. Item 1 of the table in subsection 974-75(1) of the ITAA 1997 provides that an equity interest is an interest in the company as a member or stockholder of the company. If the trustee of the EST subscribes for new shares in the company, those new shares represent an interest in the company as a member or stockholder of the company and are therefore equity interests in the company. Accordingly, CGT event D1 will not happen if the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company by virtue of the operation of paragraph 104-35(5)(c) of the ITAA 1997. | Detailed Reasoning - CGT event H2: Subsection 104-155(1) of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset that you own and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. However, paragraph 104-155(5)(c) provides that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. As detailed in relation to CGT event D1 above, if the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company, those new shares represent an interest in the company as a member or stockholder of the company and are therefore equity interests in the company. Accordingly, CGT event H2 will not happen if the trustee of the EST satisfies its obligations under the Incentive Plans by subscribing for new shares in the company by virtue of the operation of paragraph 104-155(5)(c) of the ITAA 1997. | Detailed Reasoning - Conclusion: The company is issuing shares to the trustee of the EST. The shares issued by the company represent equity interests under the meaning provided by Subdivision 974-C of the ITAA 1997. Therefore, neither CGT event D1 nor CGT event H2 happens when the company fulfils the subscription of shares by the trustee of the EST under the Incentive Plans. Since no CGT event occurs, the company will not make a capital gain or capital loss as a result of the issuance of its shares. | Detailed Reasoning - Question 7: Will the Commissioner make a determination under paragraph 177F(1)(b) of the ITAA 1936 to cancel a tax benefit that has been obtained, or would, but for section 177F of the ITAA 1936 be obtained, by the company as a result of the scheme? | Detailed Reasoning - Detailed reasoning: Paragraph 46 of Law Administration Practice Statement PS LA 2005/24 states that Part IVA of the ITAA 1936 is a general anti-avoidance provision that gives the Commissioner the discretion to cancel a tax benefit that has been obtained, or would but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. Paragraph 177F(1)(b) of the ITAA 1936 provides that where Part IVA of the ITAA 1936 applies to a scheme in connection with which a tax benefit has been obtained, or would but for section 177F of the ITAA 1936 be obtained, the Commissioner may in the case of a tax benefit that is referable to a deduction, or a part of a deduction, being allowable to the taxpayer in relation to that year of income, determine that the whole or a part of the deduction, or of the part of the deduction, as the case may be, shall not be allowable to the taxpayer in relation to a year of income. Before the Commissioner can exercise the discretion in section 177F of the ITAA 1936, the requirements of Part IVA of the ITAA 1936 must be satisfied. Broadly, the requirements are: i) a scheme, as defined in section 177A of the ITAA 1936 was carried on by the taxpayer ii) a tax benefit, as identified in section 177C, was or would, but for section 177F, have been obtained in connection with the scheme, and iii) having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA applies. The term 'scheme' for the purposes of Part IVA of the ITAA 1936 is defined in subsection 177A(1) of the ITAA 1936 to mean: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. This definition of 'scheme' is very broad. It encompasses not only a series of steps but also the taking of one step ( Federal Commissioner of Taxation v. Hart [2004] HCA 26; (2004) 217 CLR 216; 2004 ATC 4599; (2004) 55 ATR 712). A scheme, as defined, is wide enough to cover a series of interrelated acts by a person or persons over a period of time. Whether a scheme is wider or narrower should not be relevant in determining if the test in section 177D of the ITAA 1936 is met with respect to the scheme, as long as the tax benefit in question is sufficiently connected with the scheme. Paragraph 177C(1)(b) of the ITAA 1936 defines the obtaining of a tax benefit in connection with a scheme to include a deduction being allowable to the taxpayer in relation to a year of income where the whole, or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out. Paragraph 177CB(1)(b) of the ITAA 1936 provides that section 177CB of the ITAA 1936 applies to the decision as to whether the whole, or a part of a deduction not being allowable to a taxpayer might reasonably be expected to have occurred, if a scheme had not been entered into. Subsection 177CB(2) of the ITAA 1936 states that a decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme). Subsection 177CB(3) of the ITAA 1936 states: A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme. Subsection 177CB(4) of the ITAA 1936 then states: In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative: (a) have particular regard to: (i) the substance of the scheme; and (ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); but (b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme). The identification of a tax benefit necessarily requires consideration of the income tax consequences, but for the operation of Part IVA of the ITAA 1936, of an 'alternative hypothesis' or 'alternative postulate' (hereinafter referred to as a counterfactual). This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out (paragraph 69 of PS LA 2005/24). A reasonable expectation requires more than a possibility. It 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 ( Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359; 94 ATC 4663; (1994) 28 ATR 344 (Peabody's Case )). In applying the reasonable expectation test to identify the counterfactual(s), it may be useful to consider: • the most straightforward and usual way of achieving the commercial and practical outcome of the scheme (disregarding the tax benefit) • commercial norms, for example, standard industry behaviour • social norms, for example, family obligations • behaviour of relevant parties before / after the scheme compared with the period of operation of the scheme, and • the actual cash flow. If a tax benefit is obtained in connection with a scheme that also achieves a wider commercial objective (disregarding the tax benefit) then, it is reasonable to expect that in the absence of the scheme the wider objective would still have been pursued by the means of a transaction or dealing with a different form or shape (paragraph 76 of PS LA 2005/24). The alternative counterfactual(s) also forms the background against which an objective conclusion can be drawn as to the purpose of a person in entering the scheme for the purposes of section 177D of the ITAA 1936. In accordance with subsection 177D(1) of the ITAA 1936, Part IVA of the ITAA 1936 applies to a scheme if it would be concluded, with regard to the eight matters provided by subsection 177D(2) of the ITAA 1936, that the persons, or one of the persons who entered into or carried out the scheme, or any part of the scheme did so for the purpose of a relevant taxpayer to obtain a tax benefit in connection with the scheme; or enabling the relevant taxpayer and/ or other taxpayers each to obtain a tax benefit in connection with the scheme. It is not relevant whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers. Pursuant to subsection 177A(5) of the ITAA 1936, 'purpose' includes the dominant purpose where there are two or more purposes. The eight matters provided by subsection 177D(2) of the ITAA 1936 to be regarded when determining whether Part IVA of the ITAA 1936 applies are as follows: (a) the manner in which the scheme was entered into or carried out (b) the form and substance of the scheme (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (d) the result in relation to the operation of the ITAA 1936 and ITAA 1997 that, but for this Part IVA of the ITAA 1936, would be achieved by the scheme (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out, and (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). It is possible for Part IVA of the ITAA 1936 to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. The key issue is whether the particular scheme, or any part of it, was entered into or carried out by any person for the relevant purpose having regard to the factors in subsection 177D(2) of the ITAA 1936. The consideration of purpose or dominant purpose under subsection 177D(2) of the ITAA 1936 requires an objective conclusion to be drawn. The conclusion required is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the eight matters. While the eight matters in subsection 177D(2) of the ITAA 1936 will not be equally relevant in every case, each of the eight matters are taken into account and weighed together in arriving at a conclusion as to dominant purpose. Consideration of the factors will involve a comparison of the scheme with the alternative counterfactual(s). Subsection 177D(3) of the ITAA 1936 provides that Part IVA of the ITAA 1936 only applies to a scheme if the relevant taxpayer has obtained, or would but for section 177F of the ITAA 1936 obtain a tax benefit in connection with the scheme. | Detailed Reasoning - The scheme: The establishment of the Incentive Plans and the EST; the payment of irretrievable and non-refundable cash contributions to the trustee of the EST; and the acquisition of the company shares by the trustee of the EST under the Incentive Plans is a scheme for the purposes of subsection 177A(1) of the ITAA 1936. In determining whether the company will obtain a tax benefit as defined in section 177C of the ITAA 1936, it is necessary to identify what might reasonably be expected to have occurred if the relevant scheme had not been entered into or carried out (Macquarie Finance v. Commissioner of Taxation [2005] FCAFC 205; 2005 ATC 4829; (2005) 61 ATR 1). The expectation of the alternative counterfactuals must be reasonable, as distinct from a mere possibility ( Peabody's Case ; paragraph 71 of PS LA 2005/24). | Detailed Reasoning - Alternative counterfactuals: In order to determine the tax benefit that would be derived by the company from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes that the company might reasonably have been expected to enter into to achieve its purpose in relation to employee remuneration. Possible counterfactuals include: 1) the company issues new shares to employees without the EST interposed 2) assuming company law requirements are satisfied, the company purchase shares itself for employees, or 3) the company use direct cash bonuses as remuneration instead of shares in the company. Under the scheme outlined in the facts, the company is entitled to an income tax deduction for the amount of irretrievable and non-refundable contributions made to the trustee of the EST. If counterfactual 1 was carried out, the company may not receive a tax deduction for this amount, thus leading to a tax benefit. If counterfactual 2 was carried out, the company would still be entitled to a deduction if it simply purchased shares for employees, thus no tax benefit arises by undertaking the scheme. If counterfactual 3 was carried out, the company would still be entitled to a deduction if it simply paid the amount to employees as cash bonuses, thus no tax benefit arises by undertaking the scheme. Only counterfactual 1 gives rise to a tax benefit for the company and requires a consideration of the dominant purpose of the scheme in determining whether the Commissioner may apply Part IVA of the ITAA 1936. | Detailed Reasoning - Dominant purpose: Each of the matters under subsection 177D(2) of the ITAA 1936 will now be considered to determine the dominant purpose of the scheme outlined in the facts. (a) the manner in which the scheme was entered into or carried out The manner in which the scheme has been entered into is one which is common amongst taxpayers wishing to remunerate their employees with shares in the taxpayer as part of the employees' remuneration. By using the EST as opposed to issuing shares directly to Participants the company is utilising an arm's length vehicle (through the use of a third party trustee) to acquire and hold shares in the company. This assists the company in meeting Corporations Law requirements and managing risks associated with dealing in its own shares. Further, the use of the EST gives the company a single vehicle for the administration of the Incentive Plans and any plans which the company introduces in the future, and for the convenient outsourcing of the administration to a third party administrator (the trustee of the EST) who efficiently oversees such Incentive Plans as part of their business. This outsourcing will free up internal resources The use of the EST also provides the company with capital management flexibility by being able to direct the trustee of the EST to either buy shares or to subscribe for an issue of new shares in the company (thereby providing flexibility to manage the dilution of existing shareholders if required). If the company were to simply issue shares to employees as opposed to effectively acquiring them at market value, then this may impact the perceived value of the company's publicly listed shares creating potential issues for the company or its shareholders. (b) the form and substance of the scheme The substance of the scheme is the provision of remuneration in the form of shares to eligible employees who participate in the Incentive Plans. It takes the form of payments by the company to the trustee of the EST as trustee of the EST who acquires shares and transfers them to Participants. While the existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out The tax benefits that will be received by the company following the payment of irretrievable and non-refundable amounts to the trustee of the EST will be received in the year in which the Participants acquire the Share Options or Rights to which those payments relate. Whilst money may be contributed to the EST as cash flow allows prior to this time, the legislation operates to delay the deduction and consequential tax benefit to the company until at least the time at which the expenditure to acquire the company shares through the EST on behalf of the Participant becomes almost certain upon the Participant acquiring the Share Options or Rights. The scheme is also structured in an ongoing capacity with ongoing expenses incurred, indicating that the purpose of the scheme is to motivate eligible employees over an extended period to achieve performances by the company that are in line with shareholders requirements. This is indicative of the non-tax purpose of the scheme to motivate and reward staff. There is no large upfront payment of a deductible amount. (d) the result in relation to the operation of the ITAA 1936 and ITAA 1997 that, but for Part IVA of the ITAA 1936, would be achieved by the scheme The result of the scheme is to provide the company with allowable deductions for the contributions it makes to the EST. However, it is noted that the contributions are irretrievable and non-refundable and reflect a genuine non-capital outgoing on the part of the company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme As noted above, the company makes irretrievable and non-refundable contributions to the EST and those contributions constitute a real expense with the result that the company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with the EST as part of the scheme than would be the case if the company provided shares to Participants by purchasing them (subject to company law requirements), there is nothing artificial, contrived or notional about the expenditure incurred by the company in having the trustee of the EST, an unrelated third party, administer the EST. (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme The contributions by the company to the EST will form part of the corpus of the EST and must be dealt with by the trustee of the EST in accordance with the terms of the relevant trust deed (that is, exclusively for the acquisition of shares to provide to Participants in the ESS). The company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the trustee of the EST acquires shares from the company by subscribing for new issues at market value. Therefore, the contributions made by the company amount to a real change to the financial position of the trustee of the EST, though these funds are held on trust for Participants who will become absolutely entitled to those amounts. The financial position of Participants in the schemes will also undergo a real change in the amount of the shares they receive. This amount represents a reward for performance as part of the normal remuneration for an employee of the company. There is nothing artificial, contrived or notional about these changes. (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out No other relevant consequences have been identified as a result of the scheme. (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f) The relationship between the company and the Participants in the scheme is one of employer and employee. The trustee of the EST is not a related entity of the company and is under a fiduciary obligation to act in the interests of the Participants in the Incentive Plans. The contributions made by the company to the trustee of the EST are commensurate with the company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. There is nothing to suggest that the company, nor any other person involved in the scheme, are not acting at arm's length with each other. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit. Viewed in their totality, the eight matters above indicate that the scheme has an overall basis in achieving the commercial goals of the company through the use of an EST to facilitate the remuneration of employees with shares in the company. The use of similar EST structures is common among companies choosing to remunerate staff with shares in the company. The use of a third party trustee provides commercial benefits to the company in managing the administrative aspects of this method of remuneration as well as minimising issues surrounding corporations law that may arise during the scheme. It is accepted that the degree of commercial purpose present indicates that the scheme does not have a dominant purpose of obtaining a tax benefit for the company. | Detailed Reasoning - Conclusion: The use of the EST by the company represents a scheme as defined in Part IVA of the ITAA 1936 and the company does obtain a tax advantage, in that it receives a tax deduction for contributions made to the EST used to subscribe for the company shares that would otherwise be unavailable. Objective consideration of the matters contained in subsection 177D(2) of the ITAA 1936 supports a conclusion that the dominant purpose of the company entering into the scheme was not to obtain a tax benefit. The Commissioner will not make a determination under paragraph 177F(1)(b) of the ITAA 1936 to deny, in part or full, any deduction claimed by the company in respect of the irretrievable and non-refundable cash contributions made to the trustee of the EST to fund the subscription for, or acquisition, of the company shares under the Incentive Plans. | Detailed Reasoning - Question 8: Does paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) exclude the provision of Share Options or Rights to Participants under the Incentive Plans from being a fringe benefit? | Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA defines the term 'fringe benefit' to be a benefit provided: • to an employee or an associate of an employee • at any time during the year of tax or in respect of a tax year • by the employer or an associate of the employer, and • in respect of the employment of the employee. However, paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivisions 83A-B or 83A-C of the ITAA 1997 applies, from being a fringe benefit. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. | Detailed Reasoning - Application of Subdivision 83A-B of the ITAA 1997: Subsection 83A-20(1) of the ITAA 1997 provides that Subdivision 83A-B of the ITAA 1997 applies to an ESS interest if you acquire the interest under an ESS at a discount. Note 1 provides that if Subdivision 83A-C of the ITAA 1997 applies to the ESS interest, then Subdivision 83A-B of the ITAA 1997 will not apply to that ESS interest. | Detailed Reasoning - ESS interests: An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. The Share Options and Rights acquired by the Participants represent a right to acquire a beneficial interest in a share in the company, and subsequently represent an ESS interest for the purposes of subsection 83A-10(1) of the ITAA 1997. | Detailed Reasoning - ESS interests provided under an ESS: Subsection 83A-10(2) of the ITAA 1997 defines an ESS 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. These ESS interests in the company are provided to the Participants (being employees of the company) or their associates by the company under the Incentive Plans. The Share Options and Rights are issued to Participants as part of their remuneration package from the company and are subsequently considered to be in relation to the relevant employees' employment. The scheme in the form of the Incentive Plans therefore represents an ESS under subsection 83A-10(2) of the ITAA 1997. The Share Options and Rights are issued to Participants at a discount. Therefore, subsection 83A-20(1) of the ITAA 1997 applies to the Share Options and Rights as they represent ESS interests acquired under an ESS at a discount. That being so, Subdivision 83A-B of the ITAA 1997 will apply to the ESS interests or, depending on the circumstances, Subdivision 83A-C of the ITAA 1997 would alternatively apply. In either case the requirement in paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA will be met. | Detailed Reasoning - Conclusion: The discount obtained as part of the issue of the Share Options and Rights is a benefit that represents the acquisition of an ESS interest under an ESS to which Subdivision 83A-B of the ITAA 1997 applies. Therefore, paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes the provision of the Share Options and Rights to Participants from the definition of fringe benefit. | Detailed Reasoning - Question 9: Do the irretrievable and non-refundable cash contributions made by the company to the trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans represent a fringe benefit as defined under subsection 136(1) of the FBTAA? | Detailed Reasoning - Detailed Reasoning: Paragraph 28 of TR 2014/D1 provides that benefits such as shares or rights provided by the trustee of an ERT to an employee of an employer are fringe benefits where they are provided under an arrangement between the trustee and the employee's employer in respect of the employment of the particular employee and are not otherwise specifically excluded from the definition of 'fringe benefit'. 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 ITAA 1997). | Detailed Reasoning - Applicability of paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA is applicable in relation to the ESS interests mentioned in subsections 83A-5(1) and 83A-5(2) of the ITTPA 1997. Subsection 83A-5(1) of the ITTPA 1997 provides that Division 83A of the ITAA 1997 applies in relation to an ESS interest if: a) the interest was acquired on or after 1 July 2009; and b) the relevant share or right (within the meaning of Division 13A of Part III of the Income Tax Assessment Act 1936 , as in force at the time (the pre-Division 83A time) occurring just before Schedule 1 to the Tax Laws Amendment (2009 Budget Measures No 2) Act 2009 commenced, (former Division 13A)) was not acquired (within the meaning of former Division 13A) before 1 July 2009. ATO Interpretative Decision ATO ID 2010/108 considers whether a trust that acquires shares to satisfy rights provided under an ESS and engages other incidental activities, is an EST within the meaning of subsection 130-85(4) of the ITAA 1997. It is recognised that the right to acquire a share, and the beneficial interest in the share that is acquired pursuant to the exercise of the right, are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. The beneficial interest in the company shares acquired by the Participants following the acquisition of the shares by the trustee of the EST represents an ESS interest acquired by the Participants at the time they become beneficially entitled to the shares in accordance with subsection 83A-10(1) of the ITAA 1997. The acquisition date of the shares from either the exercise or vesting of 'Division 13A Share Options', 'Pre 1 July Division 83A Share Options' and 'Division 83A Share Options' will be on or after 1 July 2009, meaning that Participants will become beneficially entitled to the shares after that date. As the company shares represent ESS interests that will have been beneficially acquired by the Participants on or after 1 July 2009, both conditions in section 83A-5 of the ITTPA 1997 are satisfied and the exclusion in paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA applies. | Detailed Reasoning - Employee Share Trust: Given that the exclusion in paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA applies, the irretrievable and non-refundable cash contributions made by the company to the trustee of the EST are not a fringe benefit, provided the trust is considered to be an EST under the meaning of the term EST provided by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an EST for an ESS 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). Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the trustee undertake incidental activities that are a function of managing the Incentive Plans, and administering the EST. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, ATO ID 2010/108 sets out the Commissioner's view on when an employee share trust satisfies the sole activities test. In particular, the Commissioner considers that activities that are a necessary function of managing an ESS and administering a trust will satisfy the sole activities test. Such activities 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 EST 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 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. As documented in the trust deed of the EST, the company has established the EST for the sole purpose of obtaining Shares for the benefit of Participants, including subscribing for, or acquiring, allocating, holding, and delivering Shares under the Incentive Plans and other employee equity plans for the benefit of Participants. The terms of the trust deed limit the trustee of the EST to only undertake activities that enable the EST to satisfy its stated purpose. Further, the Trust Deed limits the activities of the trustee of the EST to those that are 'necessary or expedient' to administer and maintain the Trust and the Trust Assets in fulfilling the purpose for which the trust was established. The scheme is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire beneficial interests in shares in the company are provided to employees in relation to the employee's employment. Therefore, paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 are satisfied because the trustee of the EST: • uses money contributed by the company to acquire shares in the company, and • ensures that ESS interests, being beneficial interests in those the company shares, are provided under the ESS, to the employees of the company or their associates in accordance with the Trust Deed and relevant rules of the Incentive Plans. The trustee of the EST will satisfy the sole activities test as there is nothing to indicate that it will undertake any activities that are not necessary functions of managing the ESS and administering the trust. Therefore, paragraph 130-85(4)(c) of the ITAA 1997 is satisfied. The trust is therefore an EST within the meaning provided by subsection 130-85(4) of the ITAA 1997 as all of the conditions of that subsection are satisfied. | Detailed Reasoning - Conclusion: The trust is an EST in accordance with the meaning of employee share trust in subsection 130-85(4) of the ITAA 1997. Accordingly, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA excludes the irretrievable and non-refundable cash contributions made by the company to The trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans from being a fringe benefit. | Detailed Reasoning - Question 10: Will the Commissioner make a determination under subsection 67(1) of the FBTAA to increase the aggregate fringe benefits amount of the company by the amount of any tax benefit obtained as a result of the arrangement under which the irretrievable and non-refundable cash contributions were made by the company to the trustee of the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans? | Detailed Reasoning - Detailed reasoning: Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA of the ITAA 1936, in that the section requires the identification of an arrangement, a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and is activated by the making of a determination by the Commissioner. Law Administration Practice Statement PS LA 2005/24 provides guidance on the application of section 67 of the FBTAA. Paragraphs 145-148 state: 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 and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner will only 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. Question 18 of the Appendix in Miscellaneous Taxation Ruling MT 2021 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 PS LA 2005/24 states: 151. the approach outlined in this practice statement (refer to paragraph 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. Under the Incentive Plans, the benefits provided to The trustee of the EST by way of irretrievable and non-refundable cash contributions to the EST; and to participants by way of the provision of rights (Share Options and Rights) will not be subject to fringe benefits tax. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the scheme, if the arrangement had not been entered into. Therefore, the fringe benefits tax 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 Incentive Plans.

Is the company entitled to a deduction under section 8-1 of the ITAA 1997 for the irretrievable and non-refundable cash contributions made by the company to the EST to fund the subscription for, or acquisition of, the company shares under the Incentive Plans?