Private ruling: Employee Share Schemes (ESS): Consequences for employer
Date of advice: 8 March 2017
Published: August 2017
Ruling period: Income years commencing from 1 July 2016 ending 30 June 20XX
Date scheme commenced: 1 July 2016

Ruling: Q1: Will Company A be entitled to an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 in respect of the cash contributions made by Company A (or any subsidiary member of the Company A income tax consolidated group) to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in Company A by the Trustee of the Trust? | A1: Yes | Q2: Will Company A be entitled to an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 in respect of costs incurred by Company A (or any subsidiary member of the Company A income tax consolidated group) to the Trustee of the Trust in relation to the ongoing administration of the Plans and the Trust? | A2: Yes | Q3: Will the cash contributions made by Company A (or any subsidiary member of the Company A income tax consolidated group) to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in Company A be deductible by Company A at a time determined by section 83A-210 of the Income Tax Assessment Act 1997 : (a) if the contributions are made in an income year before the income year in which the Participant acquires the relevant ESS interest? (b) if the contributions are made in the same year of income, or an income year after the income year, in which the Participant acquired the relevant ESS interest? | A3: Question 3(a) - Yes, section 83A-210 of the Income Tax Assessment Act 1997 applies and the deduction for cash contributions will be allowable in the year of income when the Participant acquires the relevant ESS interest. Question 3(b) - No, section 83A-210 of the Income Tax Assessment Act 1997 does not apply and the deduction for cash contributions will be allowable in the same year of income when the contribution is paid to the Trust. | Q4: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in part or in full, any deduction claimed by Company A: (a) in respect of the cash contributions made by Company A (or any subsidiary member of the Company A income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee to satisfy the Performance Rights? (b) in respect of the costs incurred by Company A (or any subsidiary member of the Company A income tax consolidated group) in relation to the ongoing administration of the Plans and the Trust? | A4: Question 4(a) - No Question 4(b) - No

Relevant facts and circumstances: Company A is a publicly listed company that carries on business in Australia. Company A is the head company of an income tax consolidated group (the Group). The Trust is an employee share trust settled by Company A for the purposes of administering various award plans. Company B (Trustee) is the trustee for the Trust. The Trustee is not a subsidiary of the Group, nor a related entity of the Company A. The Plans Company A has established employee award plans (the Plans) as part of its reward and retention policy for certain employees. The Plans were approved under the terms and conditions of the Plans (Plan Terms). The purpose of the Plans is specified in the Plan Terms. The Plans operate in accordance with the Plan Rules. The Plan Rules together with the Plan Terms set out the requirements, terms and conditions of the Plans. Key definitions of the Plans are specified in the definitions clause of the Plan Terms. Plan Participants Under the Plan Terms, Company A may from time to time invite an eligible employee to acquire a right under the Plans. Eligible employees are those employees of the Group whose participation in the Plans is approved by the Company A board of directors (Board). An eligible employee who accepted the invitation to participate in the Plans is referred to as 'the Participant'. Performance Rights Grant of performance rights Pursuant to the Plan Rules, each Participant is granted a number of performance rights as determined by the Board (Performance Rights). Participants acquire Performance Rights under the Plans for nil monetary consideration. Under the Plan Terms, the Performance Rights granted under the Plans will be subject to the terms and conditions of the Plan Terms until such time as the Performance Right is registered in the name of the Participant and is not subject to any Vesting Conditions. Performance condition The Performance Rights will vest in accordance with the performance condition set out in the Plan Rules. The number of Performance Rights which may vest in respect of the specified Performance Period will be determined by reference to achievement of specific performance targets (Performance Condition) for that period. Vesting and conversion of performance rights Performance Rights will vest in accordance with a specified schedule over a three year vesting period and provided the Participant remains employed by the Group at the relevant date (collectively, the Vesting Conditions). The Plan Rules state that provided the Participant remains employed by the Group at the relevant date, the Performance Rights will be converted into shares in Company A (Shares) on a one-for-one basis at nil financial cost to the Participant. Each Participant will be notified when their respective Performance Rights are converted to Shares. The Plan Terms provide that the vesting and conversion of Performance Rights does not confer any legal or equitable interests in Shares represented by the Performance Rights until the relevant Vesting Date and any conversion to Shares has been completed. Lapse and forfeiture of Performance Rights The Plan Terms provide that subject to the Plan Rules, the Performance Rights will lapse upon the earliest of: ● the expiry date ● failure to meet a Performance Condition within the Performance Period, or ● occurrence of a forfeiture condition. The Plan Rules set out the forfeiture condition for Performance Rights granted under the Plans and includes the circumstance where the Participant ceases employment with the Group or commits an act of gross misconduct in relation to the Group. The Plan Terms state that where a Participant acts fraudulently or dishonestly or in breach of its obligations for Company A, any unvested Performance Rights and/or Shares will lapse or deemed to be forfeited immediately. No consideration or compensation will be payable in relation to the lapse of a Performance Right. The Plan Terms sets out limitations on the offers of Performance Rights: ● the Plans must be operated in accordance with the company's constitution, any Law, Australian Securities Exchange (ASX) Listing Rules and the ASX Settlement Operating Rules ● Participant must not assign to any person any of their legal or equitable rights to Performance Rights and/or their right to be delivered Shares upon vesting of Performance Rights The Trust The Plan Terms provide that Company A may appoint a trustee to acquire and hold Shares either on behalf of Participants or for the purpose of the Plans. Company A settled the Company A employee share trust under the terms of the Deed of Trust. The definitions clause of the Trust Deed contains definitions of terms used in the Trust Deed: ● Allocated Trust Share means a Share allocated to and held by the Trustee on behalf of a specified Participant. ● Sole Activities Test means the requirements to satisfy the definition of 'employee share trust' for the purposes of section 130-85(4) of the ITAA 1997. ● Trust Assets means all the property, rights and income of the Trust ● Trust Share means a Share which is held by the Trustee in accordance with the terms of the Trust Deed. ● Unallocated Trust Share means a Trust Share held by the Trustee pursuant to the Deed which has not been allocated to a specified Participant. Company A established the Trust in accordance with the Trust Deed. The Recitals of the Trust Deed provides: ● Company A operates the Plans to provide certain eligible employees with increased incentives to make contribution to long term growth and performance of the company. ● Company A wishes to establish a trust for the sole purpose of subscribing for, acquiring, allocating, holding and delivering Shares in Company A under the Plans. The Trust Deed contains a 'Sole Activities Test' clause which provides that the Trust must at all times be managed and administered so that it satisfies the Sole Activities Test in subsection 130-85(4) of the Income Tax Assessment act 1997 . The Trust Deed contains a Trustee general powers clause giving the Trustee all the powers in respect of the Trust, Trust Shares and Trust Assets to discharge its obligations under the Trust Deed. The Trust Deed also contains certain limitations on the Trustee's general powers. The Trustee must not carry out activities that are not matters or things which are necessary of expedient to administer and maintain the Trust and the Trust Assets. The Trustee must not carry our activities which result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan Rules. The Trust Deed governs the operation of the Trust. Under the Trust Deed, the Trustee will in accordance with the instructions received from the Board pursuant to the Plan Rules and as soon as reasonably practicable, acquire, allocate and deliver or transfer Shares for the benefit of a Participant provided that the Trustee receives sufficient payment to subscribe for or purchase Shares for that purpose and/or has sufficient Unallocated Trust Shares available. The Trustee must acquire Shares in accordance with the specific terms of the Trust Deed. Subject to the Trustee receiving sufficient funds or having sufficient capital and notice from Company A instructing the Trustee to subscribe for and/or purchase Shares, the Trustee must within a specified period of time purchase the requisite number of Shares on-market or, subscribe for the requisite number of Shares. Pursuant to the Trust Deed, the Trustee allocates and holds Trust Shares for an on behalf of the Participants. Unallocated Trust Shares must be held by the Trustee on trust for Participants generally from time to time in accordance with the Trust Deed and applied for the benefit of Participants by allocation of any Unallocated Trust Shares to specified Participants upon notice given by Company A in accordance with the Trust Deed and Plan Rules. Allocated Trust Shares are held by the Trustee on behalf of the relevant Participant in accordance with the Trust Deed and subject to the relevant Plan Rules. Under the Trust Deed, each specified Participant is absolutely entitled to Allocated Trust Shares held by the Trustee on their behalf and the Trustee will deal with the Allocated Trust Shares in accordance with the directions of the relevant Participant. The Participants on whose behalf the Trustee holds Allocated Trust Shares have substantially the same rights in respect of those Allocated Trust Shares (other than bare legal title) as if the Allocated Trust Shares were registered directly in the name of the relevant Participant. The Trustee may sell or transfer Allocated Trust Shares to a Participant upon written direction by the relevant Participant. Rights attached to Trust Shares Voting rights The Trustee must not exercise any voting rights in relation to any Unallocated Trust Shares. In relation to Allocated Trust Shares, each Participant may direct the Trustee as to how to exercise the voting rights attached to Allocated Trust Shares standing to their account. Distributions The terms of the Trust Deed provide for the Trustee's obligations in respect of dividends received by the Trustee - ● in respect of Allocated Trust Shares - the Participant will have an absolutely vested and indefeasible entitlement to receive from the Trustee all dividends actually paid by the Company A on all Allocated Trust Shares held by the Trustee on behalf of the Participant and the Trustee agrees to pay any such dividends to Participants as soon as reasonably practicable after those dividends are paid by Company A. ● in respect of Unallocated Trust Shares - the Trustee may apply any capital receipts, dividends or other distributions received in respect of Unallocated Trust Shares to purchase further Shares to be held on trust for the purposes of this Trust. Pursuant to the Trust Deed, a Participant is presently entitled to so much of the net income of the Trust for a year of income which is attributable to the Allocated Trust Shares held by the Trustee on behalf of the Participant, proceeds of sale arising from transactions or events related to Allocated Trust Shares. The balance of net income of the Trust for a year of income to which no Participant is entitled may be accumulated by the Trustee as an addition to the Trust Assets. Funding Cash contributions Under the Trust Deed, Company A provides cash contributions to the Trustee of the Trust for the purposes of acquiring Shares in accordance with the Plans. All funds received by the Trustee from Company A will constitute accretions of the corpus of the Trust and will not be repaid to Company A (or any member of the Group). Funds received by the Trustee from Company A may be paid to the Company only where the Trustee subscribes for Shares in accordance with the Trust Deed and the Plan Rules. The amount of funds provided by Company A will be determined based on an estimated forecast of the likelihood of Performance Rights vesting to determine if Trust holds sufficient Shares to satisfy future potential vesting. None of the cash contributions provided by Company A to the Trust is or will, either in whole or in part, be used for the purpose of providing loans or financial assistance to Participants under any circumstances. Trustee remuneration and reimbursement of costs Pursuant to the Trust Deed, Company A will pay fees to the Trustee for the provision of independent trustee services. The Trustee will reimburse the Trustee for costs incurred in relation to the ongoing administration of the Plans and the Trust. Rights of Company A in Trust Assets Company A has no proprietary or beneficial interest in the Shares or Trust Assets. The Trustee must not pay the proceeds of sale of any forfeited shares to any member of the Group. The Trustee must not pay any balance or apply remaining Trust Assets to any member of the Group. Other matters Company A's reasons for implementing the Plans via a Trust include: ● The Trust assures the Participants that the Shares, and any incidental dividend income or associated rights, are held independently of Company A and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries, i.e. the Participants ● The Trust provides opportunity to improve cash flow planning, manage costs and the company's share capital position. ● The Trust is the most appropriate vehicle to acquire Shares and accumulate dividend income during the Vesting Period, thus assisting Company A to meet the costs of the Plans. ● The Trust enables easier administration of the Plans.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Subsection 177A(1) | Income Tax Assessment Act 1936 Subsection 177A(5) | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Subsection 177C(1) | Income Tax Assessment Act 1936 Paragraph 177C(1)(b) | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Subsection 177D(2) | Income Tax Assessment Act 1936 Section 177F | Income Tax Assessment Act 1936 Subsection 177F(1) | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Subsection 8-1(1) | Income Tax Assessment Act 1997 Subsection 8-1(2) | Income Tax Assessment Act 1997 Paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Section 8-10 | Income Tax Assessment Act 1997 Section 25-5 | Income Tax Assessment Act 1997 Subsection 25-5(1) | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Subsection 83A-10(1) | Income Tax Assessment Act 1997 Subsection 83A-10(2) | Income Tax Assessment Act 1997 Section 83A-20 | Income Tax Assessment Act 1997 Subsection 83A-20(1) | Income Tax Assessment Act 1997 Section 83A-210 | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-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(c) | 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 (ITAA 1997) unless otherwise stated | Detailed Reasoning - Issue 1 Question 1: The general deduction provision is section 8-1 which states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. | Detailed Reasoning - Incurred: To qualify for a deduction under section 8-1, a contribution to the trustee of an employee share trust must be incurred. As a broad guide, the employer incurs an outgoing at the time the employer owes a present money debt that it cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance (TR 94/26). A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust 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 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight). On the facts, the contributions are paid to the Trust for the sole purpose of subscribing for or acquiring, allocating, holding and delivering Shares in accordance with the Plans and cannot be repaid or refunded to Company A or the Group. Accordingly, cash contributions provided by Company A to the Trust are considered to be incurred at the time the contributions are paid to the Trust (subject to section 83A-210). | Detailed Reasoning - For the purpose of gaining or producing assessable income: Further, to be deductible under section 8-1, a contribution must have been: ● incurred in gaining or producing assessable income (first limb), or ● necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (second limb). In order to satisfy the second limb of section 8-1 there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' ( Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 (Ronpibon); Magna Alloys and Research Pty Ltd v. Federal Commission of Taxation (1980) 49 FLR 183 (Magna Alloys)). The characterisation of an outgoing is a question of fact to be considered in the context of the business itself and in the context of what the outgoing was intended or expected to achieve. The objective circumstances that give rise to the expenditure will typically provide a clear explanation of the benefit intended to be achieved by the expenditure and thereby its essential character. Draft Taxation Ruing TR 2014/D1 Income tax: employee remuneration trust arrangements (TR 2014/D1), provides the Commissioner's current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust arrangement (ERT). Paragraph 14 of TR 2014/D1 provides where an employer: ● carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business; ● makes a contribution to the trustee of an 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), then, such a contribution will satisfy the nexus of being necessarily incurred in carrying on that business. Paragraph 178 of TR 2014/D1 provides that the Commissioner will generally accept a relatively period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration 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. Paragraph 15 of TR 2014/D1 further provides that a contribution by an employer to the trustee of an employee remuneration trust will not satisfy either limb of subsection 8-1(1) where that contribution is intended to be applied for the benefit of the owners, controllers or shareholders of the employer (in, or by reason of, that capacity), or associates of any of them. On the facts, Company A carries on business in Australia and engages employees in the ordinary course of its business for the purpose of gaining assessable income. Company A makes cash contributions to the trustee of an employee share trust which are solely used for the purpose of remunerating employees within a relatively short period of time. Accordingly, the cash contributions Company A makes to the Trust are considered to be necessarily incurred in carrying on its business in gaining or producing assessable income. Subsection 8-1(2) does not apply in this case. The cash contributions are not capital or of a capital nature, outgoings of a private or domestic nature, or incurred in gaining or producing non assessable non-exempt income or exempt income. No other provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997 prevents Company A from deducting the cash contribution. | Detailed Reasoning - Conclusion: As the cash contributions are outgoings necessarily incurred by Company A in carrying on its business of gaining or producing assessable income and the cash contributions are not outgoings of capital or of a capital nature, Company A is entitled to a deduction under section 8-1 for the cash contributions it provides to the Trust for the sole purpose of acquiring Shares in accordance with the Plans and Trust Deed. | Detailed Reasoning - Issue 1 Question 2: Under the Trust Deed, Company A may pay to the Trustee fees for the provision of independent trustee services and reimburse expenses incurred by the Trustee in relation to the ongoing administration of the Plans and the Trust. The costs incurred by Company A in relation to the ongoing administration of the Plans and the Trust will be deductible under section 8-1 as either: ● costs incurred in gaining or producing assessable income; or alternatively ● costs necessarily incurred in carrying on business for the purpose of gaining or producing its assessable income. On the facts, the fees and costs incurred in relation to the ongoing administration of the Plans and the Trust are revenue and part of the ordinary employee remuneration costs of the company. As such, costs incurred by Company A in relation to the ongoing administration of the Plans and the Trust will be deductible under section 8-1. However, to the extent that the relevant costs are also deductible under another provision of the ITAA 1936 or ITAA 1997, those costs will only be deductible under that provision and not section 8-1 (section 8-10). Section 25-5 specifically deals with tax-related expenses. Subsection 25-5(1) states: You can deduct expenditure you incur to the extent that it is for: (a) managing your tax affairs; or (b) complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity; or (c) the general interest charge or shortfall interest charge; or (ca) a penalty under Subdivision 162-D of the GST Act; or (d) obtaining a valuation in accordance with section 30-212 or 31-15. As such, any costs incurred by Company A for the purposes specified in subsection 25-5(1) will be deductible under that section rather than section 8-1. Therefore, Company A will be entitled to a deduction under section 8-1 for costs incurred in relation to the ongoing administration of the Plans and the Trust, to the extent that the relevant costs are not tax-related expenses. Tax-related expenses will be deductible under subsection 25-5(1) rather than section 8-1. | Detailed Reasoning - Issue 1 Question 3: In Question 1, the provision of cash contributions to the Trust by Company A for the purpose of remunerating its employees under an employee share scheme is an outgoing incurred in carrying on business and is deductible under section 8-1. The deduction under section 8-1 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 provides: 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. Section 83A-210 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 a Participant under the Plans, in relation to the Participant's employment. A Performance Right granted under the Plans is an ESS interest for the purposes of section 83A-210 as the Performance Right provides the Participant with a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1)). The granting of the Performance Rights to Participants, the provision of money to the Trust under the Plans, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to the Participants are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money (in this case, cash contributions) to the Trustee necessarily allows the scheme to proceed. Consequently, the provision of cash contributions to the Trustee is considered to be for the purpose of enabling the Participants, indirectly as part of the Plans, to acquire Shares upon the conversion of Performance Rights. The acquisition time for the purposes of section 83A-210 occurs when the Performance Rights are granted to the Participants. Accordingly, a deduction for the purchase of Shares to satisfy the obligation arising from the grant of Performance Rights previously made to Participants is allowable to the company in the same year of income in which the contribution was paid to the Trustee, under section 8-1. However, the amount of money used by the Trustee to acquire excess Shares is intended to meet obligations arising from a future grant of Performance Rights. The excess payment therefore occurs before the Participants acquire the relevant Performance Rights under the Plans. Section 83A-210 will apply and the excess payment will be deductible to the company in the year of income when the relevant Performance Rights are subsequently granted to the Participants. Consequently, the deduction for cash contributions: ● in respect of contributions made to the Trust in relation to Performance Rights previously granted to Participants - is allowable in the same year of income when cash contribution is paid to the Trust, under section 8-1. ● in respect of contributions made to the Trust in relation to a future grant of Performance Rights - will be allowable in the year of income when the relevant Performance Right is subsequently granted to the Participant, pursuant to section 83A-210. | Detailed Reasoning - Issue 1 Question 4(a): Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Part IVA gives the Commissioner the discretion 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. This discretion is found in subsection 177F(1) of the ITAA 1936. Subsection 177F(1) of the ITAA 1936 relevantly provides: Where this Part applies to a scheme in connection with which a tax benefit has been obtained, or would but for this section be obtained, the Commissioner may: … (b) 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 a 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 that year of income. As such, before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are: ● there must be a scheme within the meaning of section 177A of the ITAA 1936, ● a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA, and ● having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA applies ('Dominant purpose' test). | Detailed Reasoning - The Scheme: A scheme is defined in subsection 177A(1) of the ITAA 1936 which states: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. It is considered that this definition is sufficiently broad to cover the arrangement in this case. | Detailed Reasoning - Tax Benefit: 'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (b) 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; In order to determine the tax benefit that would be derived by Company A from this scheme, it is necessary to examine the alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. | Detailed Reasoning - Dominant purpose: The alternative postulate also forms the background against which an objective conclusion as to purpose of a person occurs in accordance with section 177D of the ITAA 1936. Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the purpose of enabling the taxpayer to obtain the tax benefit. Section 177D of the ITAA 1936 refers to 'the purpose' of the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme. The person need not be the taxpayer. Subsection 177A(5) of the ITAA 1936 clarifies that the purpose includes the dominant purpose where there are two or more purposes. It is possible for Part IVA to apply notwithstanding that the dominant purpose of obtaining the tax benefit was consistent with the pursuit of commercial gain. The key issue under Part IVA 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 eight matters specified in subsection 177D(2) of the ITAA 1936 ('the eight factors'). 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 factors for the scheme. The eight specified factors contained in paragraphs (a) to (h) of subsection 177D(2) of the ITAA 1936 are: (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 or ITAA 1997 that, but for Part IVA, would be achieved by the scheme (e) any change in 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 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 177D(2)(f) of the ITAA 1936, of the scheme having been entered into or carried out (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 177D(2)(f). A consideration of the eight factors involves comparison of the scheme with the alternative postulate. The eight factors are to be each individually taken into account for the scheme having regard to all the relevant evidence, and then weighed together, in arriving at the conclusion as to dominant purpose. However, not all of the matters will be equally relevant in every case. Provided the eight factors are each taken into account, it is possible to arrive at the conclusion as to purpose by making a global assessment of purpose. The eight factors consist of three overlapping sets: ● the first set is about how the scheme was implemented: how its results were obtained - it comprises the first three factors in paragraphs (a), (b) and (c) of subsection 177D(2) of the ITAA 1936 and deals with manner, form and substance and timing ● the second set comprises the next four factors in paragraphs (d), (e), (f) and (g) of subsection 177D(2) and deals with the effects of the scheme: the tax results, financial changes and other consequences of the scheme ● the third set is the eighth factor in paragraph (h) of subsection 177D(2) which deals with the nature of any connection between the taxpayer and other parties. Having regard to the eight factors specified in subsection 177D(2) of the ITAA 1936, it cannot be concluded on the facts on this case that the scheme, or any part of the scheme, was entered into or carried out for the purpose of enabling Company A to obtain a tax benefit in connection with the scheme. Accordingly, the Commissioner will not make a determination under section 177F of the ITAA 1936 that Part IVA applies to deny, in part of full, any deduction claimed by Company A in respect of the cash contributions made to the Trust to fund the acquisition of Shares in accordance with the Plans. | Detailed Reasoning - Issue 1 Question 4(b): As discussed in Question 4(a) above, Part IVA gives the Commissioner the discretion in section 177F of the ITAA 1936 to cancel a tax benefit, either in full or in part, that is referable to a deduction obtained, or would but for Part IVA be obtained, by the taxpayer in connection with a scheme to which Part IVA applies. Before the Commissioner can exercise the discretion in section 177F of the ITAA 1936, the following requirements of Part IVA must be satisfied: ● there must be a 'scheme' as defined in subsection 177A (1) of the ITAA 1936; ● a 'tax benefit', as identified in section 177C of the ITAA 1936, was or would have been obtained in connection with the scheme but for subsection 177F(1) of the ITAA 1936; and ● having regard to the section 177D of the ITAA 1936, the scheme is one to which Part IVA applies. | Detailed Reasoning - The scheme: As identified above, the definition of scheme in section 177A of the ITAA 1936 is sufficiently wide to cover the arrangement described in the relevant facts and circumstances. | Detailed Reasoning - Tax benefit: This requirement was discussed in Question 4(a) above. | Detailed Reasoning - Dominant purpose: The 'dominant purpose test' and the eight factors in subsection 177D(2) of the ITAA 1936 was discussed in detail above. Having regard to the eight factors specified in subsection 177D(2) of the ITAA 1936, it cannot be concluded on the facts on this case that the scheme, or any part of the scheme, was entered into or carried out for the purpose of enabling Company A to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Conclusion: Accordingly, the Commissioner will not make a determination under subsection 177F(1) of the ITAA 1936 that Part IVA applies to deny, in part of in full, any deduction claimed by Company A in respect of costs incurred in relation to the ongoing administration of the Plans and the Trust. | Detailed Reasoning - Issue 2 Question 5: No amount will be subject to fringe benefits tax (FBT) unless a 'fringe benefit' is provided. A 'fringe benefit' arises under subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986) where a benefit is provided to an employee or associates of employees by the employer or an associate of the employer at any time during the year of tax in respect of the employment of the employee. Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 provides that a fringe benefit does not include: a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10: (1) An ESS interest , in a company, is a beneficial interest in: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company. (2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees or associates of employees (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. On the facts, the Participant acquired an ESS interest under an employee share scheme to which Subdivision 83A-B or Subdivision 83A-C applies. Therefore, the provision of Performance Rights to a Participant under the Plans is excluded from being a fringe benefit within the definition in subsection 136(1) of the FBTAA 1986. | Detailed Reasoning - Issue 2 Question 6: As discussed in Question 5 above, no amount will be subject to fringe benefits tax (FBT) unless a 'fringe benefit' is provided. A 'fringe benefit' arises under subsection 136(1) of the FBTAA 1986 where a benefit is provided to an employee or associates of employees by the employer or an associate of the employer at any time during the year of tax in respect of the employment of the employee. Paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 provides that a fringe benefit does not include: a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies However, Shares acquired by the Trustee and provided to Participants to satisfy vested Performance Rights granted under the Plans are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C applies pursuant to subsection 83A-20(2). Subsection 83A-20(2) states: However, this Subdivision [Subdivision 83A-B] does not apply if the ESS interest is a beneficial interest in a share that you acquire as a result of exercising a right, if you acquired a beneficial interest in the right under an employee share scheme. Accordingly, Shares provided to a Participant as a result of vested Performance Rights that are converted to Shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C applies and the exclusion in paragraph (h) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 does not apply. Shares provided to a Participant upon conversion of the Performance Rights will only be a 'fringe benefit' if the shares are provided to the employee in respect of the employee's employment. Whilst the expression 'in respect of' has no fixed meaning, it has been considered by the courts in various statutory contexts. In J and G Knowles and Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22 ( J and G Knowles and Associates ), the full Federal Court in examining its meaning in relation to FBT noted that: … what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment … The situation is similar to that which existed in FC of T v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The full Federal Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. Accordingly, on the facts, the Participant obtained the Share in respect of the conversion of the Performance Right and not in respect of employment. Therefore, the benefit (the Share) gained by a Participant upon the conversion of the Performance Right granted under the Plans does not give rise to a fringe benefit within the meaning in subsection 136(1) of the FBTAA 1986, as no benefit has been provided to the employee in respect of the employment relationship. | Detailed Reasoning - Issue 2 Question 7: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 provides that a fringe benefit does not include: a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment act 1997 An employee share trust is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interest in those shares or rights are provided under the employee share scheme to employees, or to associates of employees of: (c) the company; or (d) a subsidiary of the company; and (e) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). The provision of funding to the Trustee of the Trust is not subject to FBT provided that the sole activities of the Trust are obtaining shares or rights to acquire shares. In this case, paragraphs 130-85(4)(a) and (b) are satisfied because: ● the Trust acquires shares in Company A ● the Trust ensures that the ESS interests, being the beneficial interest in the Shares, are provided under an employee shares scheme by allocating, holding and delivering Shares to Participants in accordance with the Plans. Undertaking activities mentioned in paragraphs 130-85(4)(a) and (b) requires the Trustee to undertake incidental activities that are a function of managing the employee share scheme. For the purposes of paragraph 130-85(4)(c), ATO Interpretative Decision 2010/108 Income Tax: Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities (ATO ID 2010/108) sets out the Commissioner's views on an employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities. In particular, the Commissioner considers that activities that are a necessary function of managing an employee share scheme and administering a trust will satisfy the incidental 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 employee share trust on behalf of an employee, and their distribution to an employee; ● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purpose of the employee share scheme; ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee 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; ● receiving and immediately distributing shares under a demerger. Activities that result in the 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. On the facts, paragraph 130-85(4)(c) is satisfied and the Trust is an employee share trust as defined in subsection 130-85(4). Therefore, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 excludes the provision of funds to the Trustee from being a fringe benefit and Company A will not be required to pay FBT in respect of the cash contributions it makes to the Trustee to fund the acquisition of Shares in accordance with the Trust Deed. | Detailed Reasoning - Issue 2 Question 8: A 'fringe benefit' arises under subsection 136(1) of the FBTAA 1986 where a benefit is provided to an employee or associates of employees by the employer or an associate of the employer at any time during the year of tax in respect of the employment of the employee. The term 'employee' is defined in subsection 136(1) of the FBTAA 1986 to mean a current, future or former employee. In this case, a Participant under the Plans is an employee for the purposes of subsection 136(1) of the FBTAA. Whilst the phrase 'in respect of the employment of the employee' is not defined in the FBTAA 1986, the meaning of 'in respect of' in the context of FBT was considered by the full Federal Court in J and G Knowles and Associates . The Court noted that: … what must be established is whether there is a sufficient or material, rather than a causal connection or relationship between the benefit and the employment … The provision of money to the Trustee to fund the ongoing administration of the Trust and the Plans is not a benefit provided to an employee in respect of the employee's employment. Accordingly, the provision of money by Company A to the Trustee is not a benefit provided to an employee of Company A in respect of the employee's employment and therefore not a fringe benefit within the meaning in subsection 136(1) of the FBTAA 1986.

Is the provision of Performance Rights granted to Participants by Company A under the Plans a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ? | Is the provision of Shares in satisfaction of Performance Rights granted to Participants under the Plans a 'fringe benefit' within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ? | Is the provision of cash contributions by Company A to the Trust to subscribe for, or acquire on-market, ordinary shares in Company A, a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ? | Is the provision of cash contributions by Company A to the Trust to fund the ongoing administration of the Trust a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 ? | This ruling applies for the following periods: Fringe benefit tax years commencing 1 April 2016 to FBT year ending 31 March 20XX