Private ruling: Employee Share Schemes (ESS)
Published: August 2014

Ruling: Q1: Will the taxpayer company (the company) derive ordinary income assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time the contributions are made? | A1: No. | Q2: Will the subscription for new shares in the company by the trustee cause the company to derive assessable income under section 6-5 or section 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997? | A2: No. | Q3: Will contributions made by the company to the trustee give rise to a deduction under section 8-1 of the ITAA 1997 for the company? | A3: Yes. | Q4: Are the contributions made by the company to the trustee deductible under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 if the contributions are made before the relevant ESS interests are acquired? | A4: No. | Q5: Are the contributions made by the company to the trustee deductible under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the relevant ESS interests are acquired? | A5: Yes. | Q6: Will the employer be subject to fringe benefits tax (FBT) in respect of the ESS? | A6: No. | Q7: Will the company be entitled to a deduction under section 8-1 of the ITAA 1997 for costs incurred in administering the ESS? | A7: Yes. | Q8: Will the Commissioner make a determination under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to any part of the arrangements forming part of the ESS? | A8: No. | Q9: Will the Commissioner make a determination under section 67 of the FBTAA to include an amount in the aggregate fringe benefits amount of the company, by the amount of tax benefit gained from contributions made to the trustee, to fund the acquisition of shares? | A9: No.

Relevant facts and circumstances: The company is a large Australian public company. The company submitted an application for a private binding ruling (application) relating to its ESS. The ESS is considered an important component of the company's employment offer. The company established an employee share trust (EST) to manage and administer its ESS.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 51(1) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 170A | Income Tax Assessment Act 1936 paragraph 177D(b) | Income Tax Assessment Act 1936 subsection 177F(1) | Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 section 136 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraphs 136(1)(f-s) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 subsection 20-20(3) | Income Tax Assessment Act 1997 subsection 20-25(1) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 section 83A-10(1) | Income Tax Assessment Act 1997 section 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1) | Corporations Act 2001 | Corporations Regulations 2001 Explanatory Memorandum to the Tax Law Improvement Bill 1997

Reasons for decision: Summary: The contributions by the company to the EST will not result in the company deriving ordinary income assessable under section 6-5 of the ITAA 1997 at the time the contributions are made or at the time the shares are provided. | Detailed Reasoning - Reasons for decision: ATO ID 2007/217 Income Tax Employee share scheme: whether payments by an employer company to a trustee to acquire share to be later provided to employees result in the company deriving assessable income (ATO ID 2007/217) deals with the issues in this question. The circumstances dealt with in ATO ID 2007/217 are such that: the pre-funding arrangement is comparable to a hedge against a future liability where the extent of the liability is uncertain and the facts of ATO ID 2007/217 also consider the decisions in Federal Commissioner of Taxation v. Orica Ltd (1998) 194 CLR 500; (1998) 98 ATC 4494; (1998) 39 ATR 66 ( Orica ) and Commissioner of Taxation v. Unilever Australia Securities Ltd (1995) 56 FCR 152; (1995) 95 ATC 4117; (1995) 30 ATR 134 ( Unilever ). As explained in ATO ID 2007/217 the circumstances and agreements in Orica and Unilever were such that there was no element of risk mitigation against an uncertain future liability, unlike the circumstances and agreement in ATO ID 2007/217. In the context of an ESS such as that considered in ATO ID 2007/217, as a whole, for income tax purposes, payments made under the pre-funding arrangement are regarded as being outgoings on revenue account that constitute a business expense of the employer company; they are not treated as payments towards the discharge of its future liability. For these reasons, the employer company's payments under the pre-funding arrangements do not result in the company deriving income under section 6-5 of the ITAA 1997, either at the time of the payments or at the time the trustee discharges the company's liability to employees by providing shares. Application to the facts The company has established an EST. Under the ESS rules the trustee of the EST will advise the company the number of shares and the value of the contribution required in order to satisfy the obligations of the ESS. Under the schemes the company will make contributions to the trustee to acquire shares and hold them subject to vesting conditions. For the company, the contributions should be made on the same day as the trustee arranges for the issue of new shares or places an order of shares to be purchased on-market (although there may be a delay based on T+3 where shares are purchased on-market) and therefore the company does not enter into any hedge type arrangement in relation to its employee share plans. ATO ID 2007/217 considers the issue whether payments by an employer company to a trustee of a trust to acquire shares to be later provided to employees result in the company deriving assessable income. The amount of the employer company's contributions under a pre-funding arrangement is calculated to meet its estimated future liability to provide shares under the scheme and takes into account the trustee's tax and administration costs. The pre-funding arrangement is comparable to a hedge against a future liability where the extent of the liability is uncertain. ATO ID 2007/217 considers that while it is expected that the share price at the vesting day will be higher than when the trustee acquired the share, any financial advantage that might flow to the employer company from the pre-funding arrangement is contingent on an increase in the price. It is not possible for the employer company to estimate the extent of any advantage it might gain under the pre-funding arrangement, as that is dependent on the extent to which rights vest and the share price at the time rights are exercised. At the time the payments are made, any gain to the employer company is contingent and unascertainable. It is not capable of being reflected in the company's accounts. ATO ID 2007/217 also considers the decisions in Orica and Unilever . In those cases a taxpayer company contracted with a third party who promised to meet its future liabilities to redeem debentures issued by the company some years previously. The consideration provided by the company under the liability assumption agreement was approximately equal to the present value of the future liabilities and was less than the principal amount of the debentures. The liability assumption agreement did not result in the defeasance of the company's primary liability under the debentures at law but did, for practical purposes, relieve it of its future obligations. In each case the court held that the difference between the amount paid as consideration under the liability assumption agreement and the amount the company would have had to pay in the future to redeem the debentures was a gain to the company - a capital gain in the case of Orica and income under ordinary concepts in the case of Unilever . In Orica and Unilever the liability assumption agreement gave rise to a notional gain that was reflected in the company's accounts for the income year in which the company made the payment. There was no element of risk mitigation against an uncertain future liability, unlike the case in the ATOID 2007/217. ATO ID 2007/217 determines that in the context of the facts being considered, for income tax purposes, payments made under the pre-funding arrangement are regarded as being outgoings on revenue account that constitute a business expense of the employer company; they are not treated as payments towards the discharge of its future liability. For these reasons, the employer company's payments under the pre-funding arrangement do not result in the company deriving income under section 6-5 of the ITAA 1997, either at the time the payments are made or at the time the trustee discharges the company's liability to employees by providing shares. As is apparent from the relevant facts and circumstances of this ruling application, the company's ESS arrangements are similar to those stated in ATO ID 2007/217 and consequently the company's contributions to the EST will not result in the company deriving ordinary income assessable under section 6-5 of the ITAA 1997 at the time the contributions are made or at the time the shares are provided. | Detailed Reasoning - Question 2: Will the subscription for new shares in the company by the trustee cause the company to derive assessable income under section 6-5 or section 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997? | Summary: When the trustee satisfies its obligations to the participants under the ESS by subscribing for shares in the company, the subscription proceeds will not be included in the assessable income of the company under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax event under Division 104 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Ordinary Income Section 6-5 of the ITAA 1997 provides that assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts. The leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Periodicity, recurrence and regularity are regarded the most visible indicators of ordinary income. As a more general rule, amounts received as a result of carrying on a business should also represent ordinary income. Importantly, however, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. The decision in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) is a leading authority on the distinction between revenue and capital expenditure, where his Honour said at 363: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. In accordance with the rules of the ESS, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution for the shares from the trustee. The character of the contribution for share subscription received by the company from the trustee of the EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, the company is issuing the trustee with new shares. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. Accordingly, when the company receives subscription proceeds from the trustee of the EST where the EST has subscribed for shares to satisfy obligations to ESS participants, the subscription proceeds received are a capital receipt and therefore not ordinary income under section 6-5 of the ITAA 1997. Assessable recoupment, section 20-20 of the ITAA 1997 Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, 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. If the company receives an amount for the subscription of shares by the trustee of the EST the amount will not be received by way of insurance. Further, the amount will not be an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt will not be in the nature of compensation. Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision listed in section 20-30 of the ITAA 1997. Recoupment is defined in subsection 20-25(1) of the ITAA 1997 to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 (EM) states that the ordinary meaning of "recoupment" encompasses any type of compensation for a loss or outgoing (see page 19 of the EM). So far as a deduction under section 8-1 of the ITAA 1997 is allowed for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, it can be argued that in subscribing for new shares the trustee will be acquiring new shares in the company. This cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997. The receipt by the company will be made in return for issuing shares to the trustee of the EST, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 of the ITAA 1997 will apply. However, none of the provisions listed in section 20-30 of the ITAA 1997 are relevant to the current circumstances. Therefore the subscription proceeds will not be an assessable recoupment under subsection 20-20(3) of the ITAA 1997. For the above reasons, the subscription proceeds received by the company do not constitute assessable recoupments under subsection 20-20(2) or under subsection 20-20(3) of the ITAA 1997. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997. Capital Gains Tax (CGT) Section 102-20 of the ITAA 1997 states: that you make a capital gain or loss, if and only if, a CGT event happens. No CGT events occur when the trustee of the EST satisfies the obligations under the ESS by subscribing for new shares. The relevant CGT events that may be applicable when the subscription proceeds are received by the company are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, the company will issue shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the trustee of the EST, therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 will not occur. Since no CGT event occurs, there will be no amount that will be assessable as a capital gain to the company. Therefore, where the trustee of the EST satisfies the obligations under the ESS by subscribing for new shares, the subscription proceeds will not be included in the assessable income of the company under section 6-5 or section 20-20 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997. | Detailed Reasoning - Question 3: Will contributions made by the company to the trustee give rise to a deduction under section 8-1 of the ITAA 1997 for the company? | Summary: The irretrievable contributions the company makes to the EST, to acquire shares, whether by on-market purchase or subscription, are allowable deductions under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an EST that is either: • 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') to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936. To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred. As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they 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 and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance . A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 2004 ATC 4674; 55 ATR 745 (Spotlight) . Application to the facts The stated purpose of the company in establishing and funding its employee share plans is to provide an employee equity incentive plan to further align the interests of staff and shareholders, by employees earning significant rewards from the acquisition of equity in the company. The company has established an EST for the purposes of managing and administering the ESS. The company advised that it will make irretrievable cash contributions to the EST for it to acquire shares for the benefits of the participants in the ESS. Shares acquired by the trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those shares at that point in time. Given these facts, it is considered that the contributions made to the EST by the company will be incurred at the time the contributions are made. Necessarily incurred in carrying on a business Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In order to satisfy the second limb of section 8-1 of the ITAA 1997 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 at 55-58; [1949] HCA 15 at [9]-[15] ( Ronpibon ) ; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation [1980] FCA 150; 80 ATC 4542 at 4559-4561; (1980) 11 ATR 276 at 294-297 ( Magna Alloys )). Draft Taxation Ruing TR 2014/D1 Income tax: employee remuneration trust arrangements 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). The way in which the EST has been established and operates is in line with the elements of an ERT to which TR 2014/D1 applies. Paragraph 14 of TR 2014/D1 provides that 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 EST; • at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business), then, such a contribution would ordinarily 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 short period of time for the trustee of an ERT to diminish a contribution for the direct provision of remuneration to employees to be up to five years from the date the contribution was made by an employer to the trustee of an ERT. However, where the contribution has been made to facilitate an employee having an interest in the ERT corresponding to a particular number of shares (or rights to acquire shares) in the employer or in its subsidiaries to which Subdivision 83A-C of the ITAA 1997 applies, the statutory scheme is such that a relatively short period of time for these arrangements will generally be accepted as being up to seven years from the date the contribution is made. The company is a large Australian public company and engages a large number of employees in the ordinary course of carrying on that business. Under the employee share scheme arrangements, the trustee of the EST will advise the company the number of shares and the value of the contribution required in order to satisfy the obligations of the awards. The company will make contributions to the trustee to enable the trustee to either subscribe for shares or acquire them on-market. For the company, the contributions should be made on the same day as the trustee arranges for the issue of new shares or places an order of shares to be purchased on-market (although there may be a delay based on T+3 where shares are purchased on-market) and therefore the company does not enter into any hedge type arrangement in relation to its ESS. Shares acquired by the trustee will be allocated to the relevant employees who will become absolutely entitled to them. Application to the facts In regard to contributions satisfying the nexus of being necessarily incurred in carrying on a business; the company: • is a large Australian public company • contributes funds to the trustee of the EST to acquire shares, either on-market or via a subscription for new shares, to reward, motivate, attract and retain employees • ensures shares acquired by the trustee will be immediately allocated to the relevant employees who will become absolutely entitled to them. Given these facts, it is considered that the irretrievable contributions made to the EST by the company for the purpose of remunerating employees are an outgoing in carrying on a business and will satisfy the nexus of being necessarily incurred in carrying on that business, for the purpose of gaining or producing assessable income. Character of a contribution Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature. Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay... More recently in GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124; 21 ATR 1; 90 ATC 4413 the High Court pointed out that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired and that the character of the advantage sought by the making of the expenditure is a critical factor in determining the character of what is paid. A contribution to the trustee of an EST is of capital or of a capital nature, where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied by the trustee of an EST to subscribe for equity interests in the employer (for example, shares), the employer has also acquired an asset or advantage of an enduring nature. Other advantages obtained by the company could, however, include that which flows to the company from enlarging its own equity structure when the trustee of the EST acquires the equity interests in the form of shares in the company (by subscription, rather than on market). The advantage obtained by the company is, in effect, a movement of value out of profit or capitalised profit to share capital and therefore a maintenance or enhancement of the capital value of the company. As this advantage is structural and enduring, it would be of a capital nature. The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. In this regard, the draft taxation ruling TR 2014/D1 at paragraph 200 states: Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period (as discussed in paragraph 178 of this draft Ruling) of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where the employer: • intends that any direct interest in the employer acquired by the trustee of the ERT (for example shares) will be transferred to employees within that relatively short period, and • does not anticipate that such shares will be on-sold to third parties at that time or shortly thereafter. For these purposes, the Commissioner considers that a relatively short period of time is up to 5 years, increased to 7 years where the benefit in question relates to an employee share scheme (paragraph 178 of TR 2014/Dl). In the present circumstances, the trustee of the EST will advise the company the number of shares and the value of the contribution required in order to satisfy the obligations of the ESS. The company will make contributions to the trustee to acquire shares and hold them subject to vesting conditions. All shares acquired are held by the EST but will be allocated, on satisfying any vesting conditions under the ESS, to the respective account of the participants. Where the share rights are subject to a 4 year performance period measure, it is the current practice for the company to make progressive contributions to the trustee over the 4 year performance period in order to allow the trustee to either subscribe for shares or acquire shares on-market. Thus the relatively short period of time criteria will be met in respect of contributions made by the company. The non-refundable contributions made by the company to the trustee of the EST for the purposes of procuring shares to satisfy the company's commitments arising under the ESS are primarily outgoings incurred by the company in the ordinary course of carrying on its business. Therefore, such contributions are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where it is intended that: • any direct interest in the employer acquired by the trustee of the EST (for example shares) will be transferred to employees within that relatively short period, and • such shares will not be on-sold to third parties at that time or shortly thereafter. Application to the facts Under the company's ESS we consider the capital structure advantage will only be very small or trifling as: • the operation of the EST and the rules of the schemes are such that shares allocated to each employee will generally be transferred into the name of the relevant employee subject to any sale restriction that applies to such shares • shares acquired by the trustee on behalf of employees will be immediately allocated to employees who will become absolutely entitled to them at that point in time • the restricted shares are subject to an initial trading restriction of three years • the company's ESS provides employee equity incentive plans to further align the interests of staff and shareholders, by employees earning significant rewards from the acquisition of equity in the company. Therefore, apportionment for the capital structure advantage will not be required. | Detailed Reasoning - Conclusion: In sum, the irretrievable contributions the company makes to the EST, to acquire shares, whether by on-market purchase or subscription, are allowable deductions under section 8-1 of the ITAA 1997. | Summary: A deduction for a contribution under section 8-1 of the ITAA 1997 will generally be allowable in the income year in which the company incurred the outgoing, the timing of which is pursuant to section 83A-210 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997. The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 provides that if: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an ESS in relation to the employee's employment. The company's ESS, described in this ruling, has facts comparable to those set out in ATO Interpretative Decision ATO ID 2010/103 Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust (ATO ID 2010/103) which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. The granting of ESS interests, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All 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 to the trustee necessarily allows the scheme to proceed. Consequently, the provision of money by the company to the EST is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the obligation arising from the grant of ESS interests is therefore allowable to the company in the year in which the money was paid to the trustee (and the ESS interests were satisfied), under section 8-1 of the ITAA 1997. However, in circumstances where an amount of money is used by the trustee to purchase excess shares, or where the money is held in the EST, and intended to meet obligations arising from a future grant of ESS interests, the payment occurs before the employees acquire the relevant ESS interests. In such circumstances, section 83A-210 of the ITAA 1997 will apply and the excess payment will only be deductible in the year of income when the relevant ESS interests are subsequently granted and the expenditure is incurred. | Detailed Reasoning - Question 5: Are the contributions made by the company to the trustee deductible under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the relevant ESS interests are acquired? | Summary: As stated in answer to Question 4: the provision of money by the company to the EST is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the obligation arising from the grant of ESS interests is therefore allowable to the company in the year in which the money was paid to the Trustee (and the ESS interests were satisfied), under section 8-1 of the ITAA 1997. However, in circumstances where an amount of money is used by the trustee to purchase excess shares, or where the money is held in the EST, and intended to meet obligations arising from a future grant of ESS interests, the payment occurs before the employees acquire the relevant ESS interests. In such circumstances, section 83A-210 of the ITAA 1997 will apply and the excess payment will only be deductible in the year of income when the relevant ESS interests are subsequently granted and the expenditure is incurred. | Detailed Reasoning - Question 6: Will the employer be subject to fringe benefits tax (FBT) in respect of the ESS? | Summary: The contributions made by the company to the trustee of the EST, to fund the subscription for or on-market acquisition of shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA). | Detailed Reasoning - Detailed reasoning: Issue of share rights and allotment of shares An employer's liability to FBT arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee by the employer or an associate of the employer in respect of the employment of the employee. However, certain benefits are excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of a fringe benefit contained in subsection 136(1) of the FBTAA specifically excludes from the definition of a fringe benefit: 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 share or share rights granted under the ESS are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997, acquired under an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997. Therefore, the provision of shares or share rights under the ESS will not be fringe benefits within the meaning of section 136(1) of the FBTAAA. | Detailed Reasoning - Contribution to the Trustee: Paragraph (ha) of the definition of a fringe benefit in subsection 136(1) of the FBTAA states that a fringe benefit does not include: a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997). An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (a) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). The terms 'ESS interest' and 'employee share scheme' as defined in section 83A-10 of the ITAA 1997 were considered in the answer to question 3 and it is accepted the ESS will be an employee share scheme under which the ESS interests (being rights or restricted shares) are provided to employees, or associates of employees of the company. The company has established the EST and under the trust deed, the EST's sole purpose is to obtain shares for the benefit of participants, including subscribing for or acquiring, allocating, holding, and delivering shares under the ESS. There are some incidental activities undertaken by the Trustee to manage and administer the EST, such as the operation of bank accounts and maintenance of adequate books and records. Therefore, the EST satisfies the definition of an employee share trust, as defined in subsection 130-85(4) of the ITAA 1997. 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 EST from being a fringe benefit. Accordingly, the irretrievable cash contributions the company makes to the trustee of the EST, to fund the subscription for, or on-market acquisition of shares in accordance with the trust deed are not a fringe benefit under subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 7: Will the company be entitled to a deduction under section 8-1 of the ITAA 1997 for costs incurred in administering the ESS? | Summary: On the basis that the costs are revenue and not capital in nature they are regular and recurrent employment expenses, and are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The company will incur various costs in relation to the administration of the EST. For example, costs associated with the services provided by the trustee of the EST, which are likely to include: • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information; • acquisition of shares and allocation to participants; and • management of employee termination. In addition to the services to be provided by the trustee of the EST, the company will also incur various administrative costs, including the services provided by the company's accounting and legal advisors. In accordance with the trust deed, the trustee is not entitled to receive from the trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the trust. The company may pay to the trustee any fees, commission or remuneration and reimburse any expenses incurred and agreed upon from time to time. The trustee is entitled to retain for its own benefit any such remuneration or reimbursement. Such costs are likely to include brokerage costs incurred by the trustee of the EST (for example, where the trustee is directed by the company to acquire shares on-market), as well as other trustee expenses such as the annual audit of the financial statements of the EST. The costs incurred by the company in relation to the administration of the EST are deductible under section 8-1 of the ITAA 1997 as either costs: • incurred in gaining or producing the assessable income of the company; or • necessarily incurred in carrying on the company's business for the purpose of gaining or producing its assessable income. The costs incurred by the company are deductible under section 8-1 of the ITAA 1997 consistent with ATO Interpretative Decision ATO ID 2002/961 (ATO ID 2002/961) in which it was determined that such costs are part of the ordinary employee remuneration costs of a taxpayer. Also, consistent with the analysis in Question 1 (above), the costs are revenue and not capital in nature, on the basis that they are regular and recurrent employment expenses, and are deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 8: Will the Commissioner make a determination under Part IVA of the ITAA 1936 to any part of the arrangements forming part of the ESS? | Summary: There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the company in relation to the irretrievable contributions made to the EST as part of the ESS. | Detailed Reasoning - Detailed reasoning: Part IVA ITAA 1936 contains a number of anti-avoidance provisions which give the Commissioner discretion to cancel a tax benefit, however before the Commissioner can exercise the discretion under subsection 177F(1) ITAA 1936, three requirements must be met, as follows: • there is a scheme • a tax benefit was obtained or would be obtained in connection with it; and • the scheme is one to which Part IVA applies. As stated previously, the facts described in ATO ID 2010/103 are comparable to the facts relating to the company's ESS, namely that an employer has established an ESS which complies with the provisions of Division 83A of the ITAA 1997. The ESS was established to provide employee equity incentives to further align the interests of staff and shareholders and the structure of the ESS, including the use of an EST, has a range of commercial benefits for the company. The characteristics of the ESS, as described under relevant facts and circumstances establish that the substance of the scheme is the provision of remuneration, in the form of shares, to participants in the ESS. There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the company in relation to the irretrievable contributions made to the EST as part of the ESS. | Detailed Reasoning - Question 9: Will the Commissioner make a determination under section 67 of the FBTAA to include an amount in the aggregate fringe benefits amount of the employer, by the amount of tax benefit gained from contributions made to the trustee, to fund the acquisition of shares? | Summary: The benefits provided to the trustee by way of irretrievable contributions to the EST, and to eligible employees by way of the provision of share rights and shares under the company's ESS are excluded from the definition of a fringe benefit. | Detailed Reasoning - Detailed reasoning: ATO Practice Statement Law Administration (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 (MT 2021) under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states: As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of Practice Statement 2005/24 provides: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. In the present case the benefits provided to the trustee by way of irretrievable contributions to the EST, and to eligible employees by way of the provision of share rights and shares under the company's ESS are excluded from the definition of a fringe benefit. Therefore, as these benefits have been excluded from the definition of a fringe benefit and there is also no FBT currently payable under the existing ESS, nor likely to be payable under future alternative plans, the FBT liability is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA applies to include an amount in the aggregate fringe benefits amount of the company in relation to a tax benefit obtained under the company's ESS from irretrievable cash contributions made by the company to the EST to fund the acquisition of shares in accordance with the trust deed.

Will the company derive ordinary income assessable under section 6-5 of the ITAA 1997 at the time the contributions are made?