Date of advice: 31 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | The scheme for questions 1 to 6 commences on: | 1 July 2015 | Question 7 | Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of, Company A's shares constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | Answer 7 | No. | Question 8 | Will the provision of ESS interests by Company A to employees of Company A (Participants) constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | Answer 8 | No. | Question 9 | Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A shares? | Answer 9 | No. | For questions 7 to 9 this ruling applies for the following periods: | Year ending 31 March 2016 | Year ending 31 March 2017 | Year ending 31 March 2018 | Year ending 31 March 2019 | Year ending 31 March 2020 | The scheme for questions 7 to 9 commences on: | 1 April 2015

Ruling: Q1: Will Company A, as the head entity of an income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made to an independent entity acting as trustee of the Company A Employee Share Plan Trust (Trustee), to fund the subscription for, or acquisition on-market of, Company A's shares to satisfy ESS interests issued pursuant to the Company A equity based incentive plans? | A1: Yes. | Q2: Will Company A be entitled to an income tax deduction, under section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Company A Employee Share Plan Trust (EST)? | A2: Yes. | Q3: Will the irretrievable cash contributions made by Company A to the Trustee be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: Will the irretrievable cash contributions made by Company A to the Trustee be deductible under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests? | A4: Yes. | Q5: If the Trustee satisfies its obligations in accordance with the Company A Employee Share Plan Trust Deed (Deed) and the Company A Employee Option Plan Rules (Rules) by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997? | A5: No. | Q6: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, a deduction claimed by Company A for the irretrievable cash contributions made by Company A to fund the subscription for, or acquisition on-market of, Company A's shares by the Trustee? | A6: No.

Relevant facts and circumstances: Company A is listed on the Australian Securities Exchange (ASX), and specialises in the industrial sector. Company A has one class of shares on issue being ordinary shares. Company A is the head company of an income tax consolidated group comprising itself and a number of other wholly-owned Australian resident subsidiaries. Review of employee remuneration plans The Board of Directors of Company A (Board) has undertaken a review of its employee remuneration plans, and has proposed certain changes to take effect from 1 July 2015. Company A's employee remuneration plans have grown in both volume (including the number of Participants) and complexity over recent years. Company A introduced these plans after being listed on the ASX. The remuneration plans are intended to be delivered through the Employee Share Option Plan (ESOP) which was approved by shareholders at a previous Annual General Meeting. These remuneration plans are designed to motivate and retain key employees, and to help Company A achieve its overall business objectives and goals. Under the various plans Company A can issue zero exercise price options (ZEPOs) for no consideration. Under some of the plans the ZEPOS may be satisfied by either the issue of shares in Company A or by cash payment. The issue of the ZEPOs (referred to hereafter as Options) are all subject to meeting various qualifying corporate criteria, set by the Board of Company A. These criteria include, but are not limited to: (i) Net profit after tax relative to a target set by the Board; (ii) Total Shareholder Return ranking criteria relative to the total shareholder returns of constituents of the S&P/ASX200; and (iii) Earnings per Share relative to a target set by the Board. Review of capital management plans The Board is also undertaking a review of its capital management policies as the Board believe that the shares of Company A are undervalued and trading at low volumes. As part of working towards a formal capital management plan, the Board is currently considering various aspects of its capital management including dividend payout ratios, capital raising (for potential future acquisitions), share buy-backs, and its obligations under employee remuneration plans. The Board is currently considering alternative means to facilitate the funding of shares under its employee remuneration plans which will not further dilute its share capital (and in turn its share price) as part of its capital management plan review (i.e. on-market share acquisition / cash bonus versus issuing of new shares). The establishment of the EST will provide additional flexibility in relation to its capital management plans and also enable Company A to satisfy its obligations under the various employee remuneration policies. In this regard, the acquisition of shares on-market by the EST (for example) to satisfy its obligations under the employee remuneration plans should have a similar effect to a share buy-back when compared to the issue of new shares (i.e. no dilution of share capital). Given current market conditions and the Board's review of their employee remuneration and capital management policies, Company A consider that their current employee remuneration plans could be managed in a more efficient and flexible manner through the establishment of the EST. Establishment of the EST The implementation of equity based incentive arrangements using the EST will assist Company A to meet its business objectives and goals by: a) incentivising, rewarding and retaining current employees; and b) attracting new employees. Company A will transition its current equity based incentive plans into the EST. This will be achieved by amending the existing ESOP, communicating the changes to Participants and submitting any relevant documentation to the ASX. Company A's reasons for using an employee share trust arrangement for the existing and any future equity based incentive plans include: a) employee share trusts are common commercial vehicles which have been used by taxpayers for many years to provide remuneration benefits to employees. Their usage is wide spread amongst private and public companies in Australia and overseas, and they provide significant commercial benefits to taxpayers in regards to administration of equity based remuneration strategies (e.g. the trustee function can be outsourced to the share registry provider which can reduce administration costs and the need to obtain an Australian Financial Services Licence); b) provides an arm's length vehicle for acquiring and holding shares in Company A either by way of acquiring shares from another shareholder or by way of a new issue of shares, and can assist Company A in meeting Corporations Act 2001 (Cth) (Corporations Act) requirements in relation to dealing in its own shares; c) provides Company A with additional capital management flexibility, by allowing the trustee to purchase shares from another shareholder (i.e. has the effect of a share buy-back) or subscribe for shares to hold on behalf of employees. This flexibility will help Company A to manage its earnings per share, for example; d) assists with managing any insider trading issues as the trustee, as an independent party, is acquiring shares in accordance with a settled trust deed; e) provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on shares. As a trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares unless complying with those restrictions or conditions; and f) enables shares in Company A held by the EST to be recycled without increasing the percentage of ownership of other shareholders. When shares are forfeited (i.e. on termination of employment or on expiry of a plan), the shares can be re-used for future offers to employees. The proposed EST will broadly operate as follows: The Trust will be settled with nominal trust property by Company A. The Trustee of the EST will be an independent corporate trustee company, which is a subsidiary of Company A's existing share registry provider. The existing and any future equity based incentive plans will allow options that are exercised or shares that are issued, to be satisfied by the Trustee purchasing shares from other shareholders, subscribing for unissued shares in Company A or allocating 'recycled shares' (i.e. shares which have been previously acquired by the Trustee and are held in the EST), and if required, holding the shares on trust in the EST on behalf of eligible employees. The EST will be funded by Company A as head entity of the income tax consolidated group, through irretrievable cash contributions to the Trustee. The only entity that will be making contributions to the Trustee is Company A as head entity of the income tax consolidated group. After exercise of any Options, and issue of the shares, the Participant will be entitled to the dividends (if any), and to vote, on the shares held on their behalf by the Trustee. If the Trustee holds shares which are not for Participants of the equity based incentive plans, then the Trustee in its discretion may: (i) sell the shares on the ASX (ii) sell the shares by private sale (iii) if Company A offers to buy back the shares, accept the offer. Relevant legislative provisions Fringe Benefits Tax Assessment Act 1986 section 66 Fringe Benefits Tax Assessment Act 1986 section 67 Fringe Benefits Tax Assessment Act 1986 subsection 67(1) Fringe Benefits Tax Assessment Act 1986 subsection 67(2) Fringe Benefits Tax Assessment Act 1986 subsection 136(1) Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) Income Tax Assessment Act 1936 Part IVA Income Tax Assessment Act 1936 section 177A Income Tax Assessment Act 1936 subsection 177A(1) Income Tax Assessment Act 1936 section 177C Income Tax Assessment Act 1936 subsection 177C(1) Income Tax Assessment Act 1936 subsection 177CB(2) Income Tax Assessment Act 1936 subsection 177CB(3) Income Tax Assessment Act 1936 subsection 177CB(4) Income Tax Assessment Act 1936 section 177D Income Tax Assessment Act 1936 subsection 177D(2) Income Tax Assessment Act 1936 section 177F Income Tax Assessment Act 1936 s ubsection 177F(1) Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 subsection 8-1(1) Income Tax Assessment Act 1997 subsection 8-1(2) Income Tax Assessment Act 1997 paragraph 8-1(2)(a) Income Tax Assessment Act 1997 Division 20 Income Tax Assessment Act 1997 section 20-20 Income Tax Assessment Act 1997 subsection 20-20(2) Income Tax Assessment Act 1997 section 20-30 Income Tax Assessment Act 1997 Division 83A Income Tax Assessment Act 1997 section 83A-10 Income Tax Assessment Act 1997 subsection 83A-10(1) Income Tax Assessment Act 1997 subsection 83A-10(2) Income Tax Assessment Act 1997 Subdivision 83A-B Income Tax Assessment Act 1997 Subdivision 83A-C Income Tax Assessment Act 1997 section 83A-205 Income Tax Assessment Act 1997 section 83A-210 Income Tax Assessment Act 1997 section 102-20 Income Tax Assessment Act 1997 Division 104 Income Tax Assessment Act 1997 paragraph 104-35(5)(c) Income Tax Assessment Act 1997 paragraph130-85(4) Income Tax Assessment Act 1997 paragraph130-85(4)(a) Income Tax Assessment Act 1997 paragraph 130-85(4)(c) Income Tax Assessment Act 1997 section 701-1 Income Tax Assessment Act 1997 section 974-75 Income Tax Assessment Act 1997 subsection 995-1(1)


Reasons for decision: Summary: Subsection 8-1(1) is a general deduction provision. Broadly, it provides an entitlement to a deduction from your assessable income for any loss or outgoing to the extent that it is: • incurred in gaining or producing your assessable income; or • necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) prevents such a deduction to the extent that the outgoing is: • capital or of a capital nature, or • of a private or domestic nature, or • incurred in gaining or producing exempt income, or • prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. | Detailed Reasoning - Losses or outgoings: If directed by the Board, the Trustee must acquire shares to enable Company A to satisfy its obligations under the terms of the Rules. This may occur at the time of direction, or at a future time. Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those shares. Nothing in the Deed requires the Trustee to acquire shares if it does not receive sufficient contributions from Company A, or if it does not have sufficient funds to do so out of the property of the EST. The Trustee will hold unallocated Company A shares on trust for the benefit of Participants generally, and will allocate or transfer those shares to particular Participants as directed by the Board in accordance with the Rules and Deed. The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A in accordance with the Deed. The Deed provides that funds are not to be repaid to Company A (except where the Trustee subscribes for Company A shares). Even in the event of the EST's termination, the Trustee can only apply that part of the EST's capital to which no Participant is entitled for the benefit of Discretionary Beneficiaries , of which Company A is not one. On this basis, the irretrievable contributions made by Company A are considered to be a loss or outgoing for the purpose of subsection 8-1(1). | Detailed Reasoning - Relevant nexus: For a loss or outgoing to be deductible under subsection 8-1(1), the outgoing must be either incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Case law has established that this occurs where there is a sufficient nexus between the loss or outgoing and the derivation of your income ( The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295; (1935) 3 ATD 288, W. Nevill and Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290; 4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). Company A established the EST to facilitate the ESOP. Its objectives are to provide an incentive for employees to remain in their employment in the long term, and to recognise their ongoing ability and contribution to the long term success of Company A. The incentive offered is the opportunity to acquire Options, and ultimately shares, in Company A. Company A makes irretrievable contributions to the EST to enable the Trustee to acquire and hold shares for the benefit of Participants in the ESOP. All the documentation provided indicates that Company A makes the contributions to the EST solely to enable the Trustee to acquire Company A shares for Participants of the ESOP in order to remunerate and retain critical staff members. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by Company A) and the derivation of Company A's assessable income. | Detailed Reasoning - Capital or Revenue: Company A will make contributions on a recurring basis from time to time, as and when shares are to be subscribed for or acquired pursuant to the Deed. Two Federal Court decisions concluded that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature ( Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and Spotlight Stores Pty Ltd v Federal Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; 55 ATR 745). This confirms the view expressed in ATO Interpretative Decision ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme, that a company will be entitled to a deduction under section 8-1 for irretrievable contributions made to the trustee of its employee share scheme. In accordance with the Federal Court decisions noted above, we can conclude that the contributions are not prima facie capital in nature, but rather revenue outgoings incurred by Company A in carrying on its business. | Detailed Reasoning - Apportionment: The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is ultimately, and in substance, applied to the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of contributions to the Trustee in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. | Detailed Reasoning - Private or domestic in nature: Finally, nothing in the facts suggests that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Therefore, when Company A makes irretrievable contributions to the Trustee to fund the acquisition of shares in accordance with the Deed, those contributions will be an allowable deduction to Company A under section 8-1. | Detailed Reasoning - Question 2: Company A will incur costs associated with the services provided by the Trustee, including but not limited to: • employee share plan record keeping • production and dispatch of holding statements to employees • provision of annual income tax return information for employees • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Participants • management of employee termination, and • other Trustee expenses such as the annual audit of the financial statements and the annual income tax return of the Trust. In addition to services provided by the Trustee, Company A has incurred and will incur various implementation costs, including the services provided by Company A's accounting, tax and legal advisors in drafting the Deed and applying for this private ruling. In accordance with the Deed, the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. Company A must pay to the Trustee from Company A's own resources any fees, commission or other remuneration and may reimburse any expenses incurred by the Trustee as agreed upon from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 as either: • costs incurred in gaining or producing the assessable income of Company A, or • costs necessarily incurred in carrying on Company A's business for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the analysis above in question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses and therefore, are not excluded from being deductible under paragraph 8-1(2)(a). Accordingly Company A is entitled to an income tax deduction, pursuant to section 8-1, in respect of costs incurred in relation to the implementation and on-going administration of the EST. | Detailed Reasoning - Question 3: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 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 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. | Detailed Reasoning - Arrangement: Company A's adoption of the Company A ESOP, the establishment of the EST, and Company A's provision of money to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i). | Detailed Reasoning - ESS interest: An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the ESOP, an Option granted to a Participant is an ESS interest as it is a right to acquire a beneficial interest in a share in a company. | Detailed Reasoning - Employee share scheme: The term 'employee share scheme' is defined in subsection 83A-10(2) as: a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees' employment. For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term 'scheme' as follows: (a) any * arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The ESOP is an employee share scheme for the purposes of Division 83A as it is an arrangement under which an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in Company A in accordance with the Deed. A Company A share acquired by the Trustee to satisfy an Option granted under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. | Detailed Reasoning - Relevant connection: The granting of Options, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation of shares to the Participants are all interrelated components of the ESOP. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling Participants, indirectly as part of the ESOP, to acquire Options (that is ESS interests). Accordingly, if the irretrievable contributions are provided before the Options are acquired by the Participants, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance the contribution will only be deductible to Company A in the income year when the relevant Options (ESS interests) are granted to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. | Detailed Reasoning - Indeterminate rights: Options acquired under some of the plans under Company A's ESOP are indeterminate rights for the purposes of section 83A-340. This is because these Options may (at the time of acquisition) be satisfied by either delivery of a share or payment of a cash equivalent and the determination of the payment type is at the discretion of the employer. Such Options are not considered to be a right to acquire a beneficial interest in a share unless and until the time when the proportion of the Options that will be satisfied by the provision of shares is determined. Once this proportion is determined, section 83A-340 operates to treat these Options as though they had always been a right to acquire a beneficial interest in a share. If the money is provided to the Trustee before these Options are acquired (and the Options do subsequently become an ESS interest), then section 83A-340 operates to deem the Options to always have been an ESS interest. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case a deduction to fund the exercise of the Options would be available to Company A in the income year in which the Options were acquired by Participants. | Detailed Reasoning - Note: Where the Options do not become an ESS interest because they are ultimately satisfied in cash, the outgoing should not flow through the EST. This is because the EST would not be satisfying the sole activities test for the purposes of subsection 130-85(4). | Detailed Reasoning - Question 4: As discussed in the Question 3, section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares to satisfy Options, where the contribution is made after the acquisition of the relevant Options. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made where Options are satisfied with shares. | Detailed Reasoning - Ordinary Income: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was observed by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts… A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In accordance with an employee share scheme, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A is issuing the EST with a new share in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. As Company A receives subscription proceeds from the Trustee where the EST has subscribed for new shares to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt, is not on revenue account, and not ordinary income under section 6-5. | Detailed Reasoning - Section 20-20: Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments, which are described at subsection 20-20(2) as 'an amount you receive by way of insurance, indemnity or other recoupment'. Company A will receive an amount for the subscription of shares by the Trustee. There is no insurance contract in this case, so the amount is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. In relation to 'other recoupments' subsection 20-20(3) 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 in section 20-30. Recoupment of a loss or outgoing is defined in subsection 20-25(1) to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. So far as a deduction under section 8-1 allowed for bad debts or rates or taxes are concerned, section 20-30 would apply such that if there was a recoupment of that deduction, that amount would be assessable. However, the subscription for new shares in Company A by the Trustee cannot be said to be a recoupment under subsection 20-25(1). In any event, even if it were a recoupment, the receipt by Company A made in return for issuing shares to the Trustee would not be a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 could apply. As such, the amount could not be an assessable recoupment under subsection 20-20(3). | Detailed Reasoning - Capital Gains Tax (CGT): Section 102-20 states that a taxpayer can only make a capital gain or loss if, a CGT event happens. It is not possible to make a capital gain or loss if there is no CGT event. No CGT events occur when the Trustee satisfies its obligations under the ESOP by subscribing for new shares. The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75, to the Trustee and therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur. As no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A. Therefore, when the Trustee satisfies its obligations under the ESOP by subscribing for new shares, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20, nor trigger a CGT event under Division 104. | Detailed Reasoning - Question 6: Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination 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 must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and • having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose). On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions Company A made to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the EST. | Detailed Reasoning - Question 7: An employer's liability to fringe benefits tax (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. No amount will be subject to FBT unless a 'fringe benefit' is provided. Subsection 136(1) of the FBTAA defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, but does not include: (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); An 'employee share trust' is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2)) is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). As stated previously, the right to acquire a beneficial interest in a share is an ESS interest within the meaning of subsection 83A-10(1) and the ESOP is an employee share scheme within the meaning of subsection 83A-10(2). Accordingly, paragraphs 130-85(4)(a) and (b) are satisfied because: • the EST acquires shares in Company A; and • the EST ensures that the ESS interests being beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Deed and Rules of the ESOP. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertake incidental activities that are a function of managing the ESOP and administering the EST. For the purposes of paragraph 130-85(4)(c) activities which are merely incidental as set out in ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities , include: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. The purposes of paragraph 130-85(4)(c) are also reflected under Deed, which requires that the Trustee must always satisfy the Sole Activities Test as defined by reference to subsection 130-85(4). This is further reinforced by the wording of the Background to the Deed which states that: Company A wishes to establish a trust for the sole purpose of subscribing for, purchasing, delivering, allocating and holding shares under the ESOP. The EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the Trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). Consequently, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee from being a fringe benefit. Accordingly, the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - The provision of Options: A fringe benefit will only arise under subsection 136(1) of the FBTAA where benefits are provided to employees or associates of employees. Under the definition of fringe benefit, a benefit must also be provided 'in respect of' the employment of the employee. Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, states that a fringe benefit does not include: a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; The Commissioner accepts that the ESOP is an employee share scheme for the purposes of Division 83A and that Options are ESS interests (see question 3 above) and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the acquisition of Options pursuant to the ESOP will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. | Detailed Reasoning - The provision of Company A shares on exercise of Options: As stated above, 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 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated: Whatever question is to be asked, it must be remembered 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 Federal Commissioner of Taxation 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. Davies, Gummow and Lee JJ 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. When an employee of Company A or its subsidiaries accepts an offer to participate in the ESOP, they obtain an Option (being a right to acquire a beneficial interest in a share in Company A) and this Option constitutes an ESS interest. When this Option is subsequently exercised, any benefit received would be in respect of the exercise of the Option, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). Therefore, the benefit that arises to an employee upon the exercise of a vested Option (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. | Detailed Reasoning - Question 9: As mentioned in the answer to question 6, 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 1986. 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 1986 is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA 1986 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 1986 provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. Therefore, the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of Practice Statement 2005/24 provides: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA 1986. In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the EST, and to Participants by way of the provision of Options (and the Company A shares received on their vesting) under the ESOP are excluded from the definition of a fringe benefit for the reasons given in questions 7 and 8 above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no fringe benefits tax currently payable under the ESOP (without the use of an EST) and nor likely would fringe benefits tax be payable under alternative remuneration plans, the fringe benefits tax liability is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A shares.

Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated.