Private ruling: Employee share scheme arrangement
Date of advice: 14 April 2020
Published: June 2020

Ruling: Q1: Will HC as head company of the HC income tax consolidated group (HCG) obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by HC or a subsidiary member of the HCG to the Trustee of the HC Employee Share Trust (Trustee) to fund the subscription for or acquisition on-market of HC shares by the Trustee of HC's Employee Share Trust (Trust)? | A1: Yes. | Q2: Can HC obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by HC in relation to the on-going administration of the Trust, including expenses relating to preparation of tax returns for the Trust? | A2: Yes. | Q3: Are irretrievable cash contributions made by HC (or any subsidiary member of the HCG) to the Trustee, to fund the subscription for or acquisition on-market of HC shares by the Trust deductible to HC under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997, where the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: If the Trust satisfies its obligation under an HC employee share or option plan (Plan) by subscribing for new shares in HC, are the subscription proceeds included in the assessable income of HC under section 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A4: No. | Q5: Would the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by HC as head company of the HCG for the irretrievable cash contributions made by HC to the Trustee to fund the subscription for or acquisition on-market of HC shares in respect of Participants, where a share is fully paid ordinary share in the capital of HC? | A5: No. The rulings for questions 1 - 5 inclusive each apply for the following periods: Income tax year ended 30 June 20xx | Q6: Is the provision of options, rights or shares by HC to its employees (or employees of a subsidiary member of the HCG) under the Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A6: No. | Q7: Are the irretrievable cash contributions made by HC (or any subsidiary member of the HCG) to the Trustee, to fund the subscription for or acquisition on-market of HC shares in respect of Participants, treated as fringe benefits within the meaning of subsection 136(1) of the FBTAA 1986? | A7: No. | Q8: Would the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount to HC (or any subsidiary member of the HCG) by the amount of tax benefit gained from irretrievable cash contributions made by HC or any subsidiary member of the HCG to the Trustee, to fund the subscription for or acquisition on-market of HC shares? | A8: No. The rulings for questions 6 - 8 apply for the following periods: Fringe benefits tax year ended 31 March 20xx Background There are three main documents which are incorporated in this private ruling application. They are: · The HC Employee Share Trust Deed (Deed) · The Executive Option Plan Rules (EOP Rules), and · The Short Term Incentive Plan Rules (STIP Rules). HC has sites throughout Australia and one other overseas jurisdiction. HC remunerates executives by evaluating comparable executive positions in similar companies and industries. The remuneration of executives at HC is comprised of the following elements: (a) Fixed remuneration; and (b) Variable remuneration, which consists of: a. Long term incentives, under the Executive Option Plan (EOP), and b. Short term incentives under the Short Term Incentive Plan (STIP). The variable remuneration paid under one (or more) of the arrangements above are collectively referred to as being paid under the Plans. The Plans are administered in accordance with the rules that accompany the Plans and the Deed. HC's wholly owned Australian subsidiary, Company A owns the operations of the companies in the overseas jurisdiction, referred to as OSC. In addition to any potential return of profit from OSC via a dividend, HC has an agreement with OSC whereby it will pay an amount to HC calculated by reference to OSC's profit as consideration for the use of HC's various forms of intangible property, business systems, supply chains etc. No consideration is payable by OSC if its profit fails to exceed a set percentage. No consideration has been paid to HC by OSC during the ruling period. If any consideration were to be paid by OSC to HC, that amount would be included in the assessable income of HC. Whilst there was the potential for HC to have derived non-assessable, non-exempt income (NANE) from OSC, none was derived during the period ruled upon in this private ruling. HC 'recharges' OSC each month the value of the rights or options that are both acquired and vest over the vesting period. When OSC pays HC that amount each month, HC includes that amount in its assessable income for the relevant income year. For the income year ending 30 June 20xx, HC returned an amount by way of a 'recharge' for the cost of HC shares provided to OSC employee Participants. Key details of the Plans and Deed 1. The Executive Option Plan (EOP) The EOP Rules broadly operate to provide eligible employees (Participants) with the opportunity to receive options over shares in HC. In order to receive shares, the Participant must satisfy all relevant vesting criteria (unless waived by HC) in accordance with the EOP Rules. Where the vesting criteria are satisfied, then following payment of the exercise price (if any) the Participant will be entitled to shares in HC (one ordinary share for every option). Those shares are then held under the HC Employee Share Trust (Trust) on behalf of the Participant subject to conditions as specified in the EOP rules. Once those conditions are satisfied, the Participant can withdraw the shares from the Trust. Broadly, the EOP operates as follows: 1.1 Employees are invited to apply and participate in the EOP through the issue of a valid Participation Letter, which outlines the following: a) The number of options offered; b) The issue price (if any) for the grant of the option(s); c) The exercise price (if any); d) Any Vesting Conditions; e) Expiry date of option(s); and f) Restrictions on disposal of the shares once granted. 1.2 Once the Participant (employee) has received the Participation Letter, the Participant may apply to be issued with options by executing the Application within the specified time limit. At this time, the Participant can also elect to have their shares subject to a disposal restriction period from the date of exercise of the option, up to a maximum of 7 years from the issue date of the option. 1.3 While the EOP Rules state that the options will generally be issued to Participants for an amount determined by HC, and this amount may be nil, HC has advised that the options have no acquisition price and may have an exercise price based on the share price at the time of grant of the options. 1.4 The exercise of each option may also be subject to a number of vesting conditions, these include: · Service-based Vesting Condition; · Performance-based Vesting Condition; and/or · Share Price Vesting Condition These are set out in the Participation Letter. These vesting conditions must be satisfied (or otherwise waived by HC) before an option vests and can be exercised by a Participant. 1.5 Participants may choose to exercise vested options at any time prior to their expiry, subject to HC's Share Trading Policy. Subject to other rules, an option expires at the earliest of: a) Expiry Date - all Options; b) Bad Leavers - all Options; c) Unvested Options; d) Death or Disability - Unvested Options; or e) Change of Control - all Options, unless otherwise determined by the Board. 1.6 Participants can choose to exercise their vested options by notifying HC and by paying the option exercise price, if any, to HC. The exercise price of each option will be outlined in the Participation Letter. 1.7 At the time a Participant successfully exercises their options, HC must direct the Trustee to subscribe for, acquire or allocate to the Participant one share for each option exercised and hold those shares in trust on behalf of the Participant. The rules specifically provide what HC does when an option is exercised by a Participant. 1.8 HC is to provide funds to the Trustee of the Trust in order to allow the Trustee to subscribe for, and/or acquire shares to be held on behalf of the Participants under the Plan. 1.9 All shares in the same class that are issued on the exercise of an option will rank equally from the date of issue. 1.10 Participants may choose to fund the option exercise price with a loan from an external financier. The funding is provided by independent third party financiers. Where this happens, the Participant may be required to lodge a Withdrawal Notice to transfer the legal title in the shares from the Trust to a party nominated by the Participant to enable the Participant to grant a security interest over the shares. 1.11 Participants may instruct HC and the Trustee to exercise and sell sufficient shares to fund the exercise price. The exercise price is paid to HC by the broker on settlement of the trade. 1.12 A Participant may submit a Withdrawal Notice to HC and the Trustee in respect of some or all of the shares the Trust holds on behalf of the Participant. At this point, HC must direct the Trustee to transfer legal title of the shares to the Participant. 1.13 The Withdrawal Notice also allows the Trustee / HC to sell the shares on behalf of the employee and provide the proceeds of sale less brokerage costs to the employee. Short Term Incentive Plan (STIP) HC employees who are invited to participate (Participants) in the STIP are eligible to receive a short term incentive (STI) which takes the form of a contractual right to receive a cash bonus and shares in HC, subject to the achievement of certain performance conditions determined by HC. The granting of shares to a Participant pursuant to the achievement of the STI will be subject to the conditions set out in the STI Plan Rules (STIP Rules). The STIP broadly operates as follows: 2.1 At or shortly after the start of a financial year, Participants are informed in writing of their proposed remuneration package for the current financial year, which may include an offer under the STIP. 2.2 Notwithstanding any cash component, the offer under the STIP may include a right to receive shares in HC, subject to the achievement of performance conditions which are subject to an STI Expiry Date. The number of shares that relate to the Right is unknown at the date of the offer as the number is subject to the achievement of performance conditions. 2.3 A Participant must notify HC in writing within 10 days of their intention to accept the offer of a Right. There is no acquisition or exercise price for the rights. 2.4 If a Participant ceases employment with HC during the financial year, the Participant will no longer be entitled to receive any STI for that year and the Right will immediately lapse, unless expressly agreed otherwise by HC. 2.5 A Participant may not sell, assign, transfer or grant a Security Interest, or otherwise deal with a Right that has been granted to them. 2.6 Following the release of HC's financial results for a financial year, HC will determine the extent to which the employee has met the performance conditions, and will calculate the number of shares the Participant is entitled to. 2.7 Once the relevant number of vested shares has been calculated and HC has provided the Trust with the requisite funding, then HC may either: a. Issue to the Trustee ordinary shares in HC; b. Instruct the Trustee to acquire on-market ordinary shares in HC; or c. Instruct the Trustee to allocate to the Participant an amount of unallocated ordinary shares held in the Trust. 2.8 These shares will then be held in the Trust on behalf of the Participant, and subsequently allocated. 2.9 The STIP effectively provides for an automatic exercise once HC has determined the number of shares the Participant is entitled to. The Participant is not required to provide an exercise notice. 2.10 The Participant must not deal in shares held by the Trust and allocated to the Participant until the STI Restriction Expiry Date. 2.11 Provided the STI Restriction Expiry Date has passed, the Participant may lodge a withdrawal notice, and withdraw shares from the Trust. The withdrawal notice must be signed by the Participant, and instruct the Trustee to release those shares from the Trust and transfer legal title to the Participant or their nominee. Alternatively, the Participant may instruct the Trustee to sell those shares directly on their behalf. 2.12 Following receipt of the withdrawal notice, HC should ensure that the Trustee either transfers legal title, or arranges for the sale of those shares as soon as reasonably practicable. 2.13 Any dealings in shares following the provision of a withdrawal notice are subject to HC's Securities Trading Policy. 2.14 The STIP is a plan to which Subdivision 83A-C of ITAA 1997 applies. HC Employee Share Trust Deed The Trust was established as a sole purpose trust to acquire shares for employees of HC pursuant to current and future employee equity plans. The Trust provides HC with the flexibility to accommodate different incentive arrangements. The Trust provides capital management flexibility for HC, in that the Trust can use the contributions made by HC either to acquire shares in HC on market, or alternatively to subscribe for new shares in HC. Similarly, it provides an arm's length vehicle through which shares in HC can be acquired and held in HC on behalf of Participants. This allows HC to satisfy Corporations Law requirements relating to companies dealing in their own shares. An independent trustee company is the current HC Trust Trustee (Trustee). Broadly, the Trust operates as follows: 3.1 The Trust is funded by contributions from HC or a subsidiary member of the HCG (i.e. for the purchase of shares in accordance with the Plans). All fund received by the Trustee from HC or a subsidiary member of HCG will constitute Accretions to the corpus of the Trust and will not be repaid to HC and no Participant will be entitled to receive such funds. 3.2 These funds are used by the Trustee to acquire shares in HC either on-market or via a subscription for new shares in HC, based on written instructions from HC. 3.3 Irretrievable cash contributions are made regularly and progressively to the Trust in accordance with the Plan Rules and the Deed. 3.4 Shares acquired by the Trustee must be allocated to the relevant Participant and held on their behalf. Each Participant is the beneficial owner of the shares held by the Trustee on their behalf and is absolutely entitled to all other benefits and privileges attached to those shares. 3.5 After a disposal restriction period lapses, the Trustee must transfer the relevant number of shares into the name of the Participant (i.e. legal title) upon a Withdrawal Notice being submitted to the Trustee. 3.6 HC does not have any charge, lien or other proprietary right or interest in the shares acquired by the Trustee according to the Deed. 3.7 No member of the Group or the Trustee has or is entitled to obtain any beneficial interest in the Trust Assets. 3.8 Upon termination of the Trust, the Trustee must not pay any Trust Assets to any member of the Group. 3.9 No member of the Group is a beneficiary of the Trust. 3.10 The Trust will be managed and administered so that it satisfies the definition of 'employee share trust' for the purposes of subsection 130-85(4) of the ITAA 1997. Unallocated shares The Trust may acquire shares that are not allocated to Participants (unallocated shares) to satisfy future obligations under the Plans to the extent that there are options or rights granted to Participants that have not yet vested. Contributions to the Trust Whilst HC intends to wait until the options or rights vest and to receive the exercise notice and exercise price (if applicable) from Participants before providing the Trust with the cash necessary to acquire shares to satisfy the acquisition or subscription of shares related to those options or rights, HC may make cash contributions to the Trust prior to the options or rights being exercised by the Participants. Where this occurs HC will contribute to the Trust enough funding to enable purchase of shares up to 6 months in advance of when the options or rights are likely to be exercised. This will allow the Trustee to have enough shares in the Trust ahead of the time they need to be allocated to Participants, and avoids delays in times such as blackout trading periods. Ongoing administration costs of the employee share schemes (ESS) HC incurs on-ongoing administration costs for operating each ESS such as: · employee plan record keeping · production and dispatch of holding statements to employees · the acquisition of shares on market (e.g. brokerage costs and the allocation of shares to Participants), · preparing the annual audit of the financial statements, and · preparing the tax returns for the Trust.


Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 subsection 20-20(3) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 subsection 83A-340(2) | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 104-155(5)(c) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 974-75(1) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha)

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997, unless stated otherwise. In these reasons for decision, the term Award is used to refer to a right or option to acquire an ordinary share in HC, an ordinary share in HC, or an entitlement to a cash payment from HC under the Executive Option Plan (EOP) or Short Term Incentive Plan (STIP) (together referred to as the Plans ) offered by HC. | Detailed Reasoning - Questions 1 to 5: Application of the single entity rule in section 701-1: The income tax consolidation provisions allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group, with the head company of the group being the only entity recognised for income tax purposes. The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence of the SER the actions and transactions of the subsidiary members of the HC income tax consolidated group (HCG) are treated, for income tax purposes, as having been undertaken by HC as the head company of the HCG. | Detailed Reasoning - Questions 6 to 8: The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). The Commissioner has therefore provided a ruling to HC and each employing company which is a subsidiary member of the HCG in relation to questions 6 to 8. | Detailed Reasoning - Question 1: For present purposes, subsection 8-1(1) will allow you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) may preclude a deduction to the extent that the amount is (amongst other things) a loss or outgoing of capital, or of a capital nature, or is incurred in gaining or producing non-assessable non-exempt (NANE) income. HC carries on a business which produces assessable income. HC operates a number of employee share schemes as part of its remuneration strategy. Under the Plans, HC grants options or shares to Participants and makes irretrievable contributions to the Trust (in accordance with the relevant Rules and the Deed) which the Trustee will use to acquire shares (either on-market or by subscription) for allocation to Participants to satisfy their options or allocation of shares. | Detailed Reasoning - Incurred in carrying on a business: HC or a subsidiary member of the HCG must provide the Trustee with all the funds required to enable the Trustee to subscribe for, or acquire those HC shares. The contributions made by HC or a subsidiary member of the HCG are irretrievable and non-refundable to HC or the subsidiary member of the HCG in accordance with the Deed as: · On termination of the Trust, HC and any member of the Group do not have any entitlement to any part of the Trust Assets, including any unallocated shares, at any time; and · HC and subsidiary members of the HCG do not have any interest in the Capital (or corpus) or be entitled to any Income of the Trust Assets. HC has granted (and will in the future grant) Awards under the Plans as part of its remuneration and reward program for Participants. The costs incurred by HC for the acquisition of shares to satisfy options or rights arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. | Detailed Reasoning - Not capital or of a capital nature: The costs will be an outgoing incurred for periodic funding of a bona fide employee share scheme for Participants (employees) of HC and the Group. HC intends to continue to satisfy the grant of an option, right or share by using shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature and are part of the broader remuneration expenditure of HC. While the contributions may secure an enduring or lasting benefit for the employer that is independent of the year to year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be sufficiently small. Therefore, the payments are not capital, or of a capital nature. | Detailed Reasoning - Indeterminate Rights: As identified in the facts that relate to this scheme, under the STIP eligible executives may acquire Awards which can ultimately be satisfied by the provision of ordinary shares in HC, or a combination of ordinary shares and cash. The STIP is considered an Indeterminate Rights Plan for the purposes of section 83A-340. This is due to the fact that the rights relate to an indeterminate number of shares at the date of the offer. Only once the number of shares into which the rights can be converted is known (i.e. six business days after the release of audited financial results for a financial year) will the rights become an ESS interest and therefore fall within Division 83A. Until such time as HC knows how many of those Awards will be satisfied by ordinary shares, no deduction can be claimed for any contribution made to the Trust to acquire shares relating to such Awards, as it is not possible to identify the ESS interest that has been acquired which relates to an ordinary share held in the Trust. Once such an Award is determined to be an ESS interest, then section 83A-340 deems that such an Award has always been an ESS interest and HC is therefore entitled to a deduction for the contributions in the income year in which the relevant Participant acquires the right. Note: any payments of cash that arise from the acquisition of a right from the STIP by a Participant must be funded by HC's resources, and not from the Trust. | Detailed Reasoning - Conclusion: Subject to: · the operation of 83A-210 (explained in question 3), and · the deduction being correctly taken into account for Awards satisfied in cash under the STIP, then HC is entitled to an income tax deduction under section 8-1 in respect of the irretrievable cash contributions made by HC to the Trustee to fund the subscription for or acquisition on-market of HC shares by the Trustee of the Trust. | Detailed Reasoning - Question 2: Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, incurred in producing exempt or non-assessable non-exempt income or where a provision of the tax law prevents the deduction. HC carries on a business which produces assessable income. HC operates a number of employee share schemes (ESSs) as part of its remuneration strategy. HC incurs on-ongoing administration costs for operating each ESS such as: · employee plan record keeping · production and dispatch of holding statements to employees · the acquisition of shares on market (e.g. brokerage costs and the allocation of shares to Participants), · preparing the annual audit of the financial statements, and · preparing the tax returns for the Trust. These costs are regular and recurrent employment expenses which are deductible under section 8-1 as they are costs necessarily incurred in running the ESS while HC carries on its business for the purpose of gaining or producing its assessable income. Relevantly, these costs are not capital or of a capital nature as the loss or outgoings are regular and recurrent and are part of the ordinary employee remuneration costs of the company. (ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible) . | Detailed Reasoning - Conclusion: HC is entitled to an income tax deduction, pursuant to section 8-1 in respect of costs incurred by HC in relation to the on-going administration of the Trust. | Detailed Reasoning - Question 3: Section 83A-210 applies to determine the timing of the deduction, but only in respect of the contribution provided to the Trust to purchase shares in excess of the number required to grant the relevant options or rights to the employees arising in the year of income under an ESS. Further information is available in ATO Interpretative Decision ATO ID 2010/103: Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . The Plans are ESSs for the purposes of subsection 83A-10(2) as each is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (i.e., Participants) in relation to their employment with HC (or a subsidiary member of the HCG). Each Plan contains a number of interrelated components which include the provision of irretrievable cash contributions by HC to the Trustee of the Trust. These contributions enable the Trustee to acquire HC shares for the purpose of enabling each Participant, indirectly as part of the respective Plan, to acquire ESS interests. The deduction for the irretrievable cash contribution can only be deducted from the assessable income of HC in the income year when the relevant beneficial interest in a share in HC, or beneficial interest in a right to a beneficial interest in a share in HC, is acquired by a Participant under the respective Plan. | Detailed Reasoning - Conclusion: Irretrievable cash contributions made by HC (or any subsidiary member of the HCG) to the Trustee, to fund the subscription for or acquisition on-market of HC shares by the Trust are deductible to HC under section 8-1 at a time determined by section 83A-210 where the contributions are made before the acquisition of the relevant ESS interests. | Detailed Reasoning - Ordinary income: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an ESS, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by HC from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, HC is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee . Accordingly, that subscription price received by HC is a capital receipt, which is not on revenue account and is not treated as ordinary income in the hands of HC under section 6-5. | Detailed Reasoning - Recoupment by way of insurance or indemnity: Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. HC receives an amount for the subscription of shares by the Trustee. There is no insurance contract involved; therefore the receipt cannot be considered an insurance receipt. Further, 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. Subsection 20-20(3) makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30. Subsection 20-25(1) defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. To the extent that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by HC is in return for issuing shares to the Trustee, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30. The subscription proceeds therefore are not assessable recoupment under section 20-20. Capital Gains Tax ( CGT ) Section 102-20 states that you make a capital gain or loss if, and only if, a CGT event happens. The relevant CGT events that may be applicable when the subscription proceeds are received by HC are CGT event D1 (creating contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraphs 104-35(5)(c) and 104-155(5)(c) respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interests or non-equity shares in the company. As the ordinary shares of HC constitute "equity interests" (see subsection 974-75(1)), neither CGT event D1 nor CGT event H2 occurs. Accordingly, no amount is assessable as a capital gain to HC. | Detailed Reasoning - Conclusion: When the Trustee satisfies its obligation under the Plans by subscribing for new shares in HC the subscription proceeds are not included in the assessable income of HC under section 6-5 or 20-20, nor will it trigger a CGT event under Division 104. | Detailed Reasoning - Question 5: Part IVA of the Income Tax Assessment Act 1936 ( ITAA 1936 ) is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust where the conditions of Division 83A of the Income Tax Assessment Act 1997 are met. In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the Trust arrangement. | Detailed Reasoning - Conclusion: Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling HC to obtain a tax benefit. | Detailed Reasoning - Question 6: An employer's liability to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA), which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. In particular, paragraph (h) of subsection 136(1) of the FBTAA 1986 excludes the following from being a 'fringe benefit': (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; The Commissioner accepts that the relevant Plans are ESSs, the rights or options provided under the respective Plan are ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests. | Detailed Reasoning - Conclusion: Accordingly, the provision of options or rights for HC shares under the Plans are not subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C applies) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. In addition, when an option is later exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the option and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme ). | Detailed Reasoning - Question 7: One benefit excluded from being a 'fringe benefit', pursuant to paragraph (ha) of subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an employee share trust within the meaning of the Income Tax Assessment Act 1997 . In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an employee share trust, a trustee's activities must be limited to those described in paragraphs 130-85(4)(a), (b) and (c). Paragraph 130-85(4)(a) and (b) are satisfied because: · The Trust acquires shares in a company, namely HC; and · The Trust ensures that ESS interests as defined in subsection 83A-10(1) (being options or rights in the Plans) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and the Plans. Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase 'merely incidental' takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context of subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjunction with something else'. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13: Income tax: what is an 'employee share trust'? 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 to be merely incidental. In the present case, the facts as stated to the Commissioner are that no such activities have been undertaken by the Trustee. The Trust has also been managed and administered so that it meets the definition of an employee share trust under subsection 130-85(4). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the Trust from being a fringe benefit. | Detailed Reasoning - Conclusion: Therefore, the cash contribution made by HC (or any subsidiary member of the HCG) to fund the subscription for or acquisition on-market of HC shares by the Trustee is not a fringe benefit. | Detailed Reasoning - Question 8: Law Administration Practice Statement PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates (refer to paragraphs 145-148). Having regard to PS LA 2005/24, the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. Further, paragraph 151 of PS LA 2005/24 provides: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the Trust and to Participants by way of the provision of options, rights or shares under the Plans are excluded from the definition of a fringe benefit as explained in Questions 6 and 7. As these benefits have been excluded from the definition of a fringe benefit, the fringe benefits tax liability is not any less than it would have been but for the arrangement. | Detailed Reasoning - Conclusion: The Commissioner would not make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of HC or any subsidiary member of the HCG by the amount of the tax benefit gained from the irretrievable contributions made by HC to the Trustee of the Trust to fund the acquisition of HC shares under the scheme.