Private ruling: Employee share scheme
Date of advice: 9 April 2024
Published: 3 June 2024
Ruling period: Income years ended 31 December 20XX to 31 December 20XX | This ruling applies for the following periods for questions 6 to 8 : | Fringe benefits tax year ended 31 March 20XX to 31 March 20XX
Date scheme commenced: [date]

Ruling: Q1: Will Company A be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A to the Trustee of the Company A Limited Employee Share Trust (the Trust) to fund the subscription or acquisition on-market or off-market of fully paid ordinary shares in Company A (Shares) pursuant to the Company A Plans (the Plans) to satisfy the issue of Shares in respect of Participants to the Plans? | A1: Yes | Q2: Will Company A obtain an income tax deduction under section 8-1 of the ITAA 1997 for costs incurred in relation to the on-going administration of the Trust? | A4: Yes | Q3: If the Trust satisfies its obligation under the Plans by subscribing for new Shares in Company A, will the subscription proceeds be included in the assessable income of Company A under section 6-5 or 20-20 of the ITAA 1997, or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A5: No | Q4: Will the Commissioner seek to make determination under section 177F that Part IVA of the Income Tax Assessment Act (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions it made to the Trustee of the Trust to fund the subscription for, or on-market or off-market acquisition of Shares by the Trustee, pursuant to the Plans? | A6: No | Q5: Will the provision of Rights, Options, and Restricted Shares by Company A to its employees under the Plans constitute a "fringe benefit" within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A7: No | Q6: Will the irretrievable cash contributions made by Company A to the Trustee of the Trust to fund the subscription for, or acquisition on-market or off-market of Shares under the Plans, constitute a "fringe benefit" within the meaning of section 136(1) of the FBTAA? | A8: No | Q7: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A by the amount of tax benefit gained from irretrievable cash contribution made by Company A to the Trustee of the Trust, to fund the subscription for, or on-market or off-market acquisition of Shares by the Trustee, pursuant to the Plans? | A9: No

Relevant facts and circumstances: Background Company A is the head of company of the tax consolidated group (Company TCG). The scope of this ruling is limited to awards granted under the Plans to Australian tax-resident employees of the Company TCG who engage in activities that derive assessable income in Australia. Plan A Company A established Plan A, under the terms and conditions set out in Plan A. Plan A was adopted by the Board on [date]. Invitations The Board will in its discretion determine those Eligible Persons who will receive Invitations and the procedure for making invitations (including the terms and content of any offer or invitation or acceptance procedure) in accordance with Plan A. Invitations will set out a number of matters including: • the type of awards that are the subject of the Invitation • the name of the Eligible Person • the number of each type of award in each Tranche that may be applied for • the price of the awards which will be nil, unless otherwise determined by the Board • any Settlement Restrictions including the specific form of settlement applicable to awards • the Exercise Price, which will be nil unless otherwise determined by the Board. • the Term of awards in each Tranche if other than 15 years • the Vesting Conditions which are apply to awards • the Measurement Period applicable to each Tranche, in the case of certain awards • the Vesting date or how the Vesting Date will be determined. The Measurement Period applicable to each Tranche of awards will be specified in the Invitation. The Measurement Periods for awards will relate to periods when service conditions must be satisfied for them to vest. The Measurement Period for grants of awards will commence on the first day of the financial year in which the grant is made unless otherwise determined by the Board and specified in the Invitation. An Eligible Person who receives an Invitation from the Board to participate in Plan A must submit an Application (annexed to the Invitation) within the Application Period to apply for awards under Plan A. The Board will consider valid Applications made in response to Invitations and determine whether or not to accept them. Once the Board accepts an Application from an Eligible Person, that person becomes a Participant in the Plan A. Participants will be advised in writing when awards have been granted and the date of grant, via a Grant Notice or Holding Statement. Vesting Conditions • Vesting Conditions may relate to: • the performance of Company A or an aspect of Company A's operations or the performance of the Participants, or • continued service of the Participants with the Group, or • any combination of the foregoing determined by the Board for each Tranche. Vesting Conditions, if applicable, must be specified in the Invitation, along with the relationship between various levels of performance and levels of vesting that may occur. Performance conditions may vary between different Invitations and between different Tranches of Rights specified in an Invitation. Vesting of awards The Measurement Period applicable to a group of awards which has identical terms and features (Tranche) will be three years unless otherwise specified in the Invitation. The Measurement Period for awards subject to performance conditions will relate to periods when performance conditions must be satisfied for them to vest. Prior to the end of the Measurement Period, the Board may determine that some or all of the awards held by a Participant will vest in which case the Board will notify Participants in a Vesting Notice of the extent of Vesting Date. The Board also has absolute discretion to determine that Exercise Restrictions are lifted, and that some or all of any remaining unvested awards will be forfeited. The Board retains discretion to increase or decrease, including to nil, the extent of vesting in relation to each Tranche of awards if it forms the view that it is appropriate to do so given the circumstances that prevailed during the Measurement Period. Vesting of Restricted awards Restricted awards are fully vested at the Grant Date. That is, the Grant Date is also the Vesting Date for Restricted Rights. Lapsing of awards Awards will lapse automatically on the earlier of: • for unvested awards, when there is no opportunity for them to vest at the later date • the end of the Term of the award. Exercise and Exercise Restrictions Restricted Rights are subject to an Exercise Restriction for 90 days following the Grant Date, unless a longer period is determined by the Board and specified in the Invitation. Awards may be exercised at any time between the latter to occur of the Vesting Date or elapsing of the Exercise Restriction (if applicable) and the end of their Term, by the Participant submitting an Exercise Notice. If an Invitation so specifies, the exercising of vested and unexercised award may be completed automatically on a specific date following the end of the Measurement Period in which case the submission of an Exercise Notice is not required. If the Exercised Rights Value is to be provided in Shares, the Board will in its discretion, either: • issue Shares to the Participant • arrange for Shares to be acquired for the benefit of Participants by the trustee of the EST. Company A or another Company Group will contribute such funds as are needed to the EST trustee to enable the EST trustee to acquire Shares and the trustee shall apply those funds to acquire Shares as directed by the Board either market purchase or subscription to a new issue. • if the Exercised Rights Value is to be paid in cash it will be paid via payroll less any legally required withholding such as PAYG tax. Disposal Restrictions Any attempt by a Participant to deal in or dispose of certain awards will result in forfeiture in those awards by the Participant, and the Board may require the Participant to facilitate a transfer of forfeited Shares to another party nominated by the Board for nil consideration. Plan B The Company A established Plan B as part of its long-term strategy to reward and incentivise employees to share in the ownership of Company A. Plan B was first adopted by the Board on [date] and updated on [date]. Offer The Board may in its discretion invite Eligible Employees to participate in a grant of Incentive Securities (Offer), which may comprise any one or more of: • Rights • Options • Restricted Shares Each Eligible Employee should be advised of certain matters in connection with an Offer, including: • the type and number of shares being offered, or the method by which the number of shares will be calculated • the amount (if any) that will be payable for the grant of shares • any vesting Conditions or other conditions that apply, including any Vesting Period • the procedure for exercising an award following Vesting and the period(s) during which it may be exercised • where the Board has made a determination under Plan B that the Vesting and/or exercise of awards (as applicable) will only be satisfied through an allocation of Shares, rather than the making of a cash payment in lieu of an allocation of Shares • the circumstances in which awards will lapse, Shares allocated under Plan B may be forfeited or a Participant's entitlement to Shares may be reduced • how Shares may be treated if the Eligible Employee ceases employment with a Company A, and any discretions retained by the Board under rule X • any restrictions (including the period of restriction) on Dealing in relation to a restricted share or Share Allocated to the eligible Employee under Plan B • any circumstances in which a Participant's entitlement to Shares may be reduced or extinguished under Plan B. Acceptance of an Offer must be made by the Eligible Employee in accordance with the instructions that accompany the Offer, or in any other way the Board determines. Following acceptance of an Offer, the Board may refuse to allow the participation of an Eligible Employee that ceased to be an Eligible Employee or ceased to satisfy any other conditions imposed by the Board before the grant of Incentive Securities is made. Rights Where an Eligible Employee has accepted an Offer to participate in a grant of Rights, the Board will, subject to its discretion to refuse to allow participation, grant Rights to the Eligible Employee. Unless the Board determines otherwise, no payment is required for the grant of the Right, and a Right may only be registered in the name of the Eligible Employee who accepted the Offer. In the case of a Right that has vested, the Board will notify a Participant that a Right has vested. A Right will only Vest and become exercisable where each Vesting Condition, and all other relevant conditions which apply under the terms of the Offer have been satisfied or otherwise waived by the Board. If Vesting of a Right would arise in a period where Dealings by a Participant would be prohibited, the Board may determine that Vesting will be delayed until such time as Dealings are permitted. The Vesting of a Right will be satisfied by Company A allocating Shares to the Participant pursuant to rule B.3. As soon as practicable following Vesting of a Right, the Board must procure the transfer to, or procure the setting aside for, the Participant the number of Shares in respect of which Rights have Vested. The Board may exercise its discretion to make a cash payment to a Participant in lieu of an allocation of Shares. Where this occurs, Company A must pay to the Participant Australian dollar equivalent amount of the value of the Rights that have Vested. Certain awards only produce value when, at the time of Vesting and exercise, the Current Market Price exceeds a notional price determined by the Board which is specified in the Offer of the those awards. Where the Value of such awards at the time of exercise is zero or negative, the award will have no value and the Participant will have no entitlement to cash or Shares on exercise of the award. Where the award Value at the time of exercise is positive, each award will have a value and the Participant will be entitled to realise that value via the payment of cash, the issue of Shares, or a combination thereof in accordance with Plan B. An award will lapse upon the earliest to occur of: • the lapsing in accordance with Plan B (including in accordance with a term of an Offer) • the failure to meet a Vesting Condition or any other condition applicable within the Vesting Period • the receipt by the Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Right. Options Where an Eligible Employee has accepted an Offer to participate in a grant of Options, the Board will, subject to its discretion to refuse to allow participation, grant Options to the Eligible Employee. Unless the Board determines otherwise, no payment is required for the grant of an Option, and Options may not be registered in any name other than that of the Eligible Employee. An Option will only Vest and become exercisable where each Vesting Condition, and all other relevant conditions advised to the Participant by the Board, have been satisfied or otherwise waived by the Board. Vesting occurs upon notification from Company A to the Participant that an Option has been Vested pursuant to rule Y.2. The exercise of an Option will be affected in the form and manner determined by the Board and must be accompanied by the payment of the relevant Exercise Price. The exercise of an Option will be satisfied by Company A allocating Shares to the Participant pursuant to rule Y.3. Following the exercise of an Option, the Board must issue, or procure the transfer to, or the setting aside for, the Participant the number of Shares in respect of which Options have been exercised. The Board may determine that the exercise of an Option will be satisfied by Company A making a cash payment in lieu of an allocation of Shares. Options will lapse upon the earliest to occur of: • 10 years after the date on which the Options were allocated to the Participant or any other date nominated as the expiry date in the Offer • the Option lapsing in accordance with the Plan B (including in accordance with a term of an Offer) • the failure to meet a Vesting Condition or any other condition applicable within the Vesting Period • the receipt by Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Option • the Participant being declared bankrupt, becoming insolvent or making any arrangement or compromised with his or her creditors generally. Restricted Shares After an Eligible Employee has accepted an Offer to participate in a grant of Restricted Shares, the Board must, subject to its discretion to refuse to allow the participation of an Eligible Employee allocate Restricted Shares by either issuing, procuring the transfer or the setting aside of the Restricted Shares for the Eligible Employee. Unless the Board determines otherwise, no payment is required for the grant of a Restricted Shares. Restricted Shares may only be registered in the name of the Eligible Employee or the Trustee. Vesting occurs (i.e. a Share ceases to be a Restricted Share) where both: • the Vesting Period and each other relevant condition (including all Vesting Conditions) advised to the Participant by the Board have been satisfied or otherwise waived by the Board • Company A notifies the Participants that the restrictions in respect of the Restricted Share have ceased or no longer apply. If Vesting of a Restricted Share arises in a period where Dealings by a Participant would be prohibited, the Board may determine that Vesting will be delayed until such time Dealings are permitted. Unless provided otherwise in terms of an Offer, when a Share that is held by the Trustee on behalf of a Participant ceases to be a Restricted Share, the Trustee will continue to hold the Share on trust on behalf of the Participant until such time the Participant, or Company A on behalf of the Participant, directs the Trustee to either: • transfer the Share into the Participant's name or another account • sell the Share and pay the proceeds of the sale of the Participant. A Restricted Share will be forfeited upon the earliest to occur of: • the Restricted Share being forfeited in accordance with a provision of these Rules (including in accordance with a term of an Offer) • the failure to meet a Vesting Condition or any other condition applicable to the Restricted Share within the Vesting Period • the receipt by the Company A of a notice in writing from a Participant to the effect that the Participant has elected to surrender the Restricted Share • the Participant being declared bankrupt, becoming insolvent or making any arrangement or compromised with his or her creditors generally. Trust The Trust was established under the terms of the Trust Deed, amended as at [date], for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants to those plans. The Trustee is an independent third party. The powers of the Trustee are limited to the sole purpose of exercising its powers and discharging its obligations under the Trust Deed and the relevant Rules and include: • entering and executing all contracts and other documents • subscribing, acquiring, and disposing of Shares for the benefit of the beneficiaries consistent with the purposes of the Trust • selling any rights that accrue to Shares and applying the proceeds of sales in accordance with the Trust Deed and the relevant Rules • opening and operating bank accounts and other accounts for the trust • to do all things which the Trustee in its discretion considers necessary to administer and maintain the Trust and the Trust Fund in accordance with the Trust Deed. The Trust will be managed and managed and administered so that it satisfies the definition of an "employee share trust" for the purposes of section 130-85(4) of the ITAA 1997. Neither Company A nor any member of the Company A group of companies are a Beneficiary of the Trust and have no entitlement to any Shares, or any part of the Trust Fund. Acquisition of Shares Subject to being placed in sufficient funds by Company A, the Trustee must comply with a request or direction from the Board which specifies whether to subscribe for Shares or purchase Shares on-market or pursuant to an off-market transfer. General Trust Property General Trust Property is held by the Trustee on Trust for all Beneficiaries in the manner required by the Rules. Forfeited rights or interests Any Participant may forfeit any right of interest in some or all of the Allocated Trust Property that is held on their behalf (including allocated Shares, dividends in respect of allocated Shares, or cash) in accordance with the relevant Rules. Notice of the forfeiture will be given to the Trustee by the Board and/or the Participant. When any Allocated Trust Property is forfeited, it will be held as General Trust Property. Funding The Company A will keep the Trustee in funds necessary to do any act requested by the Board. The Trustee will pay all costs and expenses in administering the provisions or incurred in connection with the acquisition, registration, disposal of or other dealing with Shares and otherwise incurred by the Trustee in properly and diligently administering the Trust and carrying out its duties and the Trustee may, subject to any written agreement between the Company and the Trustee, request the Company contribute in full or in part to any cost or expense. The ongoing administration expenses of the Trust include: • brokerage costs • annual trustee fee • bank charges • cost of employee plan record-keeping • cost production and dispatch of holding statements to employees • cost of making new offers to employees under the Taxpayer's existing employee share scheme • fees for the preparation of the annual audit of the financial statements of the Trust • fees for the preparation and lodgement of the annual income tax return of the Trust. Other Any cash settlement of vested Rights, Options or Restricted Shares occurs outside of the Trust.


Reasons for decision: Summary: Company A will be entitled to an income tax deduction under section 8-1 in respect of the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market or off-market of, Shares in Company A. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, under subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. Company A carries on a business. Company A operates an employee share scheme (ESS) as part of its remuneration strategy. Under the Plans, Company A grants awards to Participants and makes irretrievable cash contributions to the Trustee (in accordance with the Plans and the Trust Deed) which the Trustee will use to acquire Shares for allocation to Participants. Incurred in carrying on a business Company A must provide the Trustee with the funds required by the Trustee to comply with its obligations to acquire Shares under the Trust Deed. The cash contributions made by Company A to the Trustee are irretrievable as: • all funds received by the Trustee from Company A are held on trust, will constitute accretions to the corpus of the Trust and will not be repaid to Company A, except where the Trustee subscribes for Shares in accordance with the Trust Deed, the Plans or relevant terms of participation • nothing in the Trust Deed confers, or is intended to confer, on Company A any encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee. Company A will grant awards as part of its remuneration and reward program for Participants. The costs incurred by Company A for the acquisition of Shares to satisfy grants of awards arise as part of these remuneration arrangements, and contributions to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. Therefore, subsection 8-1(1) is satisfied. Not capital or of a capital nature The costs will be an outgoing incurred for the periodic funding of an ESS for employees of the Company A. Costs incurred are likely to be in relation to more than one grant of Incentives, and Company A intends to satisfy the Incentives using Shares acquired by the Trust. This indicates that the irretrievable cash contributions to the Trust will be ongoing in nature and be part of the broader remuneration expenditure of Company A. While the irretrievable cash contributions may secure an enduring or lasting benefit for the employer that is independent of the year-to-year benefits that the employer derives from a loyal and contented workforce, that enduring benefit is considered to be comparatively small. Therefore, the payments are not capital, or of a capital nature, and paragraph 8-1(2)(a) is not satisfied. Accordingly, Company A will be entitled to deduct an amount under section 8-1 for its irretrievable cash contributions to the Trustee to acquires Shares to satisfy awards issued pursuant to the Plans. | Summary: Company A is entitled to an income tax deduction, pursuant to section 8-1, in respect of costs incurred in relation to the on-going administration of the Trust. | Detailed Reasoning - Detailed reasoning: In addition to the reasoning provided in Question 1,Company A has appointed the Trustee to administer the Trust and is required to keep the Trustee in funds to enable the Trustee to administer the Trust, including in respect of all expenses, outgoings, costs, and charges incurred in operating the Plans (including any amount of income or other tax payable by Company A or the Trustee in relation to the Plans and the costs of the audit of the Trust). These costs are regular and recurrent which are deductible under section 8-1 as they are costs necessarily incurred by Company A in operating the ESS while carrying on its business for the purpose of gaining or producing its assessable income. These costs are not capital or of a capital nature as the loss or outgoings are regular, recurrent, and part of the ordinary employee remuneration costs of Company A (as confirmed in Taxation Determination TD 2022/8 Income tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme' . | Summary: The irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for, or on or off-market acquisition of, Shares to satisfy Company A's obligations with respect to the issue of Shares to Participants under the Plans, will be deductible to Company A at a time determined by section 83A-210 where the contributions are made before the acquisition of the relevant ESS interests by Participants. | Detailed Reasoning - Detailed reasoning: Section 83A-210 applies to determine the timing of the deductions, but only in respect of the cash contributions provided to the Trust to purchase Shares in excess of the number required to grant the relevant ESS interest to the ultimate beneficiary arising in the year of income under an ESS. The effect of section 83A-210 is to deem the time an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust: see ATO Interpretative Decision ATO ID 2010/103 Income Tax - Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust. The Plans are an ESS for the purpose of subsection 83A-10(2) as they are schemes under which ESS interests are provided to employees in relation to their employment or engagement with Company A or a member of the Company TCG. Company A's ESS contains a number of interrelated components which include the provision of irretrievable cash contributions by Company A to the Trustee. These irretrievable cash contributions enable the Trustee to acquire Shares for the purpose of enabling each Participant, indirectly as part of the Plans, to acquire ESS interests. The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a Share, or beneficial interest in a right to a beneficial interest in a Share is acquired by the Participant under the Plans. Indeterminate rights A Right or an Option provided under the Plans are indeterminate rights because the Rights and Options can be settled by Shares or a cash equivalent in lieu of Shares, to be determined at a future time at the discretion of the employer. Therefore, an award of Rights or Options under the Plans are not a right to acquire a beneficial interest in Shares unless, and until the time it is determined by the Board that they will be satisfied by the provision of Shares. Although the indeterminate right is not an ESS interest within the meaning of subsection 83A-10(1) at the time it is granted, where it is ultimately satisfied with shares instead of cash (or when the number of shares the employee is entitled to receive is determined), the indeterminate right will, under section 83A-340, be treated as if it had always been an ESS interest. Section 83A-210 applies equally to contributions made in respect of ESS interests and indeterminate rights. Therefore, an irretrievable cash contribution in respect of an indeterminate right is taken to have been paid at the acquisition time of the ESS interest. If an indeterminate right becomes an ESS interest, deductible contributions made in respect of those rights can be claimed in the income year when the ESS interest is deemed to have been acquired under section 83A-340 (this will be the year in which the indeterminate right was granted to an employee). Once this has been established, such contributions can be matched to ESS interests issued to the employee, and where necessary, the relevant earlier income year assessments can be amended to allow the deduction (Item 28 of subsection 170(10AA)). It is important to note that an indeterminate right which is satisfied by the provision of cash never becomes an ESS interest and the irretrievable cash contribution to the Trust in respect of the provision of that right is permanently deferred. However, where that ESS interest is subsequently issued to another participating employee, this employee becomes the 'ultimate beneficiary' and the deduction is available in the income year the participating employee acquired this ESS interest. Once it is determined that the awards will be satisfied by the provision of Shares, section 83A-340 operates to treat these Rights or Options as though they had always been rights to acquire beneficial interest in shares (therefore, an ESS interest) for the purposes of section 83A-210. If irretrievable cash contributions are provided to the Trustee before these rights are acquired (and they do subsequently become ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which Participants originally acquired the Rights or Options under the Plans. For avoidance of doubt, an award of Restricted Shares under the Plan may only be settled via the issue of Shares and as such are not indeterminate rights. The Commissioner accepts that Restricted Shares constitute ESS interests under section 83A-10(1) at the time they are granted under an ESS. Accordingly, section 83A-210 will apply to irretrievable cash contributions provided to the Trustee, to the extent they relate to Restricted Shares, to modify the timing of the deduction claimed under section 8-1 to the income year in which Participants are granted Restricted Shares under the EIP. | Summary: Irretrievable cash contributions made by the Company A to the Trustee to fund the subscription for, or acquisition on or off-market of Shares by the Trustee are deductible to the Company A in the income year when the contributions are made, if the contributions are made after the acquisition of the relevant ESS interests by the ultimate beneficiaries. | Detailed Reasoning - Detailed reasoning: Consistent with the analysis in Question 3a (above), where the contribution is made after the acquisition of the relevant ESS interests, irretrievable cash contributions made by the Company A to the Trustee of the Trust to fund the subscription for, or acquisition of on or off-market Shares (i.e. from existing shareholders) by the Trust to satisfy the ESS interests granted to Participants will be deductible in the income year in which the contribution is made by the Company A under section 8-1. | Summary: If the Trust satisfies its obligations under the Plans by subscribing for new Shares in Company A, the subscription proceeds will not be included in the assessable income under section 6-5, section 20-20 or trigger a CGT event under Division 104. | Detailed Reasoning - Detailed reasoning: Section 6-5 Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an ESS, where the trustee subscribes to a company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee. The character of the subscription proceeds received by Company A from the Trust can be determined by the character of the right or thing disposed of in exchange for the receipt. Where Company A issues the Trust with new shares in itself, the character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital and is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: accessibility to an employer of the option exercise price paid by an employee. When Company A receives subscription proceeds from the Trustee where the Trustee has subscribed to new shares in Company A to satisfy obligations to Participants, those subscription proceeds received are a capital receipt and will not be treated as ordinary income under section 6-5. Section 20-20 Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. 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. The amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Therefore, the receipt of the subscription proceeds does not constitute an assessable recoupment under subsection 20-20(2). Subsection 20-20(3) provides that an amount received by you as a 'recoupment' of a loss or outgoing, except by way of insurance or indemnity, is an 'assessable recoupment' if you can deduct the loss or outgoing is deductible in the current or a prior income year because of a provision listed in the table in section 20-30. None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription amount also does not constitute an assessable recoupment under subsection 20-20(3). Division 104 A capital receipt will only be included as an assessable net capital gain only if it arises as a result of a CGT event (section 102-20). The only CGT events that may have possible application to the receipt of the subscription proceeds are CGT event D1 (Creating a contractual or other rights) and CGT event H2 (Receipt for event relating to a CGT asset) or both. Paragraphs 104-35(5)(c) and 104-155(5)(c) respectively provide that CGT event D1 and CGT event H2 do not apply if a company issues or allots equity interest or non-equity shares in the company. As the Shares constitute an "equity interest" (see subsection 974-75(1) of the ITAA 1997), neither CGT event D1 nor CGT event H2 will occur. Since no CGT event occurs, the subscription proceeds will not be assessable as a capital gain to Company A. | Summary: Part IVA of the ITAA 1936 will not apply to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-or off-market of Shares by the Trust | Detailed Reasoning - Detailed reasoning: Part IVA is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would be obtained but for section 177F, by a Company A in connection with a scheme to which Part IVA applies. The Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an EST where the conditions of Division 83A are met. In this case, the ESS does not contain the elements of artificiality or unnecessary complexity, and the commercial drivers sufficiently explain the entry into the use of the EST arrangement. Therefore, having regard to the eight factors set out in subsection 177D (2), the Commissioner has concluded that the ESS is not being entered into or carried out for the dominate purpose of enabling Company A to obtain a tax benefit. | Summary: The provision of Rights, Options or Restricted Shares by Company A to its employees will not constitute a "fringe benefit" within the meaning of that term in subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: 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. In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA excludes a benefit constituted by the acquisition of an ESS interest under an ESS (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C applies. As stated above in response to question 3a, the Commissioner accepts that an award of Restricted Shares is an ESS interest under an ESS to which Subdivision 83A-C applies and accordingly, is excluded from the definition of a 'fringe benefit' as defined under subsection 136(1) of the FBTAA. Indeterminate rights As discussed above in the response to question 3a, an Option or a Right granted under the Plans that may be satisfied in cash instead of Shares are indeterminate rights. At the time that Rights or Options are granted under the Plans, it may be unclear if paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA applies because those Rights or Options may be satisfied in cash instead of Shares. Hence, they may not be ESS interests within the meaning of subsection 83A-10(1). Where the Rights or Options are ultimately satisfied in Shares instead of cash, section 83A-340 will operate to treat those Rights or Options to have always been ESS interests within the meaning of subsection 83A-10(2) because it is a scheme under which ESS interests are provided to employees of Company A in relation to their employment. Subsection 83A-20(1) is the key condition that an ESS interest must meet for Subdivision 83A-B or 83A-C to apply. Subsection 83A-20(1) states: " This Subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount." Under the Plans, Rights or Options are granted for no consideration or payment unless otherwise determined by the Board. Therefore, Subdivision 83A-C applies, where Participants granted Rights or Options can defer the taxing point. Accordingly, the provision of Rights or Options under the Plans will not be subject to FBT on the basis that they are acquired by Participants under an ESS (to which Subdivision 83A-B or 83A-C apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of a fringe benefit in subsection 136(1) of the FBTAA. When Options or Rights granted under the Plans are exercised, it will not give rise to a fringe benefit as any benefit received would be in respect of the exercise of the Option or Right and not in respect of employment (refer to ATO Interpretive Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). For completeness, where the Right or Option granted under the Plans is ultimately satisfied with cash instead of Shares, the granting of the Option or Right under the Plans will be viewed as series of steps in the payment of salary and wages, and not a separate benefit to the payment of salary and wages which are excluded from the definition of a fringe benefit by paragraph 136(1)(f) of the FBTAA. The outcome is consistent with ATO Interpretive Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits. | Summary: The irretrievable cash contributions made by Company A or other employer entities within the Company A group to the Trustee, to subscribe for, or acquire on or off-market, shares pursuant to the Plans do not constitute a 'fringe benefit' within the meaning of that term in subsection 136(1). | Detailed Reasoning - Detailed reasoning: An employer's liability to FBT arises under section 66, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. One benefit excluded from being a fringe benefit, pursuant to paragraph (ha) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of subsection 130-85(4). In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that are relevant. To qualify as an EST, a trustee's activities must be limited to: • obtaining shares or rights in a company (paragraph 130-85(4)(a)) • ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph 130-85(4)(b)) • other activities that are merely incidental to the activities mentions in paragraphs 130-85(4)(a) and (b) (paragraph 130-85(c)). As stated above in the response to Question 6, the Commissioner accepts that the Plans are an ESS and Shares, Option and Rights granted under the Plans are ESS interests under paragraph 83A-10(1)(a) in respect of an ESS to which Subdivision 83A-B or 83A-C applies. Paragraph 130-85(4)(a) and (b) are satisfied because: • the Trust acquires shares in company, namely Company A • as stated above in response to question 3, the Commissioner accepts that the Plan is an ESS under which ESS interests are provided to Participants • the Trust ensures that ESS interests (as defined in subsection 83A-10(a)) are provided under an ESS (as defined in subsection 83A-10(2)) by allocating those Shares to the employees in accordance with the Trust Deed and the Plans. Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The phrase takes its ordinary meaning, with further guidance drawn from the context and purpose of the legislation in which it appears. 'Merely incidental' is not defined in the legislation and has not been judicially considered in the context subsection 130-85(4). The Macquarie Dictionary defines 'merely' to mean 'only as specified, and nothing more'. 'Incidental' is defined as 'happening or likely to happen in fortuitous or subordinate conjecture with something else'. The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Tax Determination TD 2019/13 Income tax: what is an 'employee share trust'? Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. In the present case, the objects of the Trust are for the sole purpose of undertaking activities that are in line with the definition of an EST under section 130-85(4)(a) and (b). The other activities undertaken by the Trustee are merely incidental under paragraph 130-85(4)(c). Therefore, the irretrievable cash contributions made by Company A, to fund the subscription for, or acquisition on- or off-market of, Shares pursuant to the Plans will not be fringe benefits within the meaning of that definition in subsection 136(1) if the FBTAA. | Summary: The Commissioner will not seek to make a determination that section 67 applies to increase the aggregated fringe benefit taxable amount to Company A or any employer entities within the Company group, by the amount of tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on-market acquisition of, Shares by the Trustee. | Detailed Reasoning - Detailed reasoning: Section 67 of the FBTAA is a general anti-avoidance provision of the FBTAA. 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, to obtain a tax benefit. The Commissioner will only 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. As stated above in response to Question 6 and 7, without the provision of a fringe benefit, no amount will be subject to FBT. The benefits provided to the Trustee by way of irretrievable cash contributions to the Trust under the Plans are excluded from the definition of a fringe benefit for the reasons provided in response to Question 6. As these benefits have been excluded from the definition of a fringe benefit, the FBT liability is not any less than it would have been but for the arrangement. 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 tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or on or off-market acquisition of, Shares.

Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription or on-or off-market acquisition of Shares by the Trustee to satisfy Company A's obligations with respect of the issue of Shares to Participants pursuant to the Plans, 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 Shares by Participants in the Plans? | Question 3b: Will the irretrievable cash contributions made by Company A to the Trustee to fund the subscription or on-or off-market acquisition of Shares by the Trustee to satisfy Company A's obligations with respect to the issue of Shares to Participants pursuant to the Plans, be deductible to Company A under section 8-1 of the ITAA 1997 in the income year when contributions are made if the contributions are made after the acquisition of the relevant Shares by Participants in the Plans? | Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company A. | This is to explain how we reached our decision. This is not part of the private ruling. | All legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise indicated.