Private ruling: Deductions under ITAA 1997 and treatment as a fringe benefit within FBTAA 1986
Date of advice: 19 September 2018
Published: November 2018

Ruling: Q1: Will Company A, as the head entity of the Company A 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 by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of the Company A Employee Share Scheme Trust (Company A EST), to fund the subscription for, or acquisition on-market of, Company A shares by the trustee to satisfy Awards issued under the Plan Rules (Plan Rules)? | A1: Yes | Q2: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the ITAA 1997 in respect of costs which are incurred by Company A, or any subsidiary member of the Company A income tax consolidated group, in relation to the implementation and on-going administration of the Company A EST? | A2: Yes | Q3: Will the irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of the Company A EST to fund the subscription for, or acquisition on-market of, Company A shares by the trustee to satisfy Awards issued under the Plan Rules, be deductible to Company A under section 8-1 of the ITAA 1997 at a time determined by section 83A-210 of the ITAA 1997 if the irretrievable cash contributions are made before the acquisition of the relevant ESS interests? | A3: Yes | Q4: If the trustee of the Company A EST subscribes for new Company A shares in order to satisfy an obligation under the Plan Rules, will the subscription proceeds received by Company A from the trustee as consideration for issuing those new shares be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a capital gains tax (CGT) event under Division 104 of the ITAA 1997? | A4: No | Q5: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, the whole or a part of, a deduction claimed by Company A for the irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of the Company A EST to fund the subscription for, or acquisition on-market of, Company A shares by the trustee to satisfy Awards issued under the Plan Rules? | A5: No The rulings for questions 1 – 5 inclusive each apply for the following periods: ● Income tax year ended 30 June 20xx ● Income tax year ended 30 June 20xx ● Income tax year ended 30 June 20xx ● Income tax year ended 30 June 20xx ● Income tax year ended 30 June 20xx | Q6: Will the irretrievable cash contributions made by Company A to the trustee of the Company A EST to fund the subscription for, or acquisition on-market of, Company A shares by the trustee to satisfy Awards issued under the Plan Rules be treated as a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A6: No | Q7: Will the provision of Awards (other than Awards ultimately settled in cash) or shares to employees of Company A under the Plan Rules be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986? | A7: No | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from irretrievable cash contributions made by Company A to the trustee of the Company A EST, to fund the subscription for, or acquisition on-market of, Company A shares by the trustee to satisfy Awards issued under the Plan Rules? | A8: No The rulings for questions 6 – 8 inclusive each apply for the following periods: ● Fringe benefits tax year ended 31 March 20xx ● Fringe benefits tax year ended 31 March 20xx ● Fringe benefits tax year ended 31 March 20xx ● Fringe benefits tax year ended 31 March 20xx ● Fringe benefits tax year ended 31 March 20xx

Relevant facts and circumstances: Company A is a public company which is listed on the Australian Stock Exchange (ASX). Company A is the head company and the only employing entity of the Company A income tax consolidated group. Company A has established a remuneration strategy that supports achievement of the business strategy of Company A. The remuneration framework has been designed to align the interests of key management personnel with shareholder interests. Company A is committed to developing and maintaining a remuneration strategy and framework which is designed to attract, retain and reward highly talented and qualified executives to lead the business of Company A. Plan Rules Company A implemented an employee share scheme governed by the Plan Rules. Company A provided the Plan Rules. Company A Employee Share Scheme Trust Company A established a trust known as the Company A Employee Share Scheme Trust (Company A EST) by entering into the Company A EST Deed. The Company A EST was established to acquire, allocate, hold and transfer shares in connection with incentive plans established by Company A. Company A provided the Company A EST Deed.

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 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 177D(2) | Income Tax Assessment Act 1936 subsection 177F(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 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 section 83A-210 | Income Tax Assessment Act 1997 paragraph 83A-210(a)(i) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 and | Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision: Detailed Reasoning - Questions 1 to 5 – application of the single entity rule in section 701-1 of the ITAA 1997: The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes. The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the ITAA 1997 . As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated, for income tax purposes, as having been undertaken by Company A as the head company of the Company A income tax consolidated group. | Detailed Reasoning - Question 1: The general deduction provision is section 8-1 of the ITAA 1997 which states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. | Detailed Reasoning - Losses or outgoings: For a deduction to be claimed under section 8-1 of the ITAA 1997 there must be a loss or outgoing. The Company A EST was established to acquire, allocate, hold and transfer shares in connection with incentive plans established by Company A such as the Plan Rules. The trustee of Company A EST holds each Plan Share that it holds on behalf of a Participant on trust for and on behalf of that Participant. The trustee of Company A EST holds Trust Assets (other than Plan Shares which are held for and on behalf of Participants) on trust for Participants to be nominated by Company A from time to time in accordance with the terms of the Company A EST Deed until the trust is terminated by operation of law or under the Company A EST Deed. The trustee of Company A EST must, in various circumstances, acquire Company A shares. The obligation of the trustee is subject to the trustee being provided with sufficient funds by Company A. Contributions made to the Company A EST by Company A, or any subsidiary member of the Company A income tax consolidated group, will be irretrievable and non-refundable. Company A has no charge, lien or any other proprietary right or proprietary interest in Company A shares acquired by the Company A EST. Company A and any Related Body Corporate will at no time have or be entitled to obtain any beneficial interest in Trust Assets. All funds received by the Company A EST from Company A or a Related Body Corporate will constitute Accretions to the corpus of the Company A EST and will not be repaid to Company A or a Related Body Corporate. On termination of the Company A EST any balance remaining of Trust Assets which is not distributed to a Participant must not be paid to Company A or a Related Body Corporate. The clauses of the Company A EST Deed when read together demonstrate that the irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group, to the Company A EST will not be retrievable or refundable to Company A. Each irretrievable cash contribution will be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. | Detailed Reasoning - Sufficient nexus: In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 it must be either incurred in gaining or producing assessable income so as to satisfy paragraph 8-1(1)(a) of the ITAA 1997 or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income so as to satisfy paragraph 8-1(1)(b) of the ITAA 1997. Paragraphs 8-1(1)(a) and 8-1(1)(b) of the ITAA 1997 are alternatives, in the event that one paragraph is satisfied the other need not be considered. A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus ( 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). In general terms, a sufficient nexus will exist between a loss or outgoing and the gaining or production of assessable income where the loss or outgoing is incidental and relevant to the income earning activities. Company A established the Company A EST for the purpose of holding Plan Shares for the benefit of Participants who are, or will become, the beneficial owners of Shares (being Company A shares) pursuant to the Plan Rules. Contributions made to the trustee of Company A EST are part of the overall employee remuneration costs of Company A. Company A has established a remuneration strategy that will support the achievement of its business strategy by providing a linkage between long-term performance and executive remuneration. The benefits provided to employees of Company A under the Plan Rules are designed to attract, retain and reward highly talented and qualified executives by aligning their interests with the interests of Company A shareholders. A sufficient nexus exists between the irretrievable cash contributions made to the trustee of Company A EST and the production of assessable income by Company A for the purposes of paragraph 8-1(1)(a) of the ITAA 1997. As paragraph 8-1(1)(a) of the ITAA 1997 is satisfied it is not necessary to consider paragraph 8-1(1)(b) of the ITAA 1997. | Detailed Reasoning - Subsection 8-1(2) of the ITAA 1997: A loss or outgoing which may be deducted from the assessable income of a taxpayer because it satisfies subsection 8-1(1) of the ITAA 1997 may nevertheless be prevented from being deducted if any of paragraphs (a) to (d) are satisfied in subsection 8-1(2) of the ITAA 1997. | Detailed Reasoning - Capital or revenue?: Paragraph 8-1(2)(a) of the ITAA 1997 operates to prevent a loss or outgoing that is capital or of a capital nature from being deductible. Company A, or a subsidiary member of the Company A income tax consolidated group, will generally make irretrievable cash contributions to the trustee of Company A EST from time to time as and when an ordinary share in Company A is to be subscribed for, or acquired on market, for a Participant pursuant to the Plan Rules and Company A EST Deed. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 it was determined that the payments made by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or of a capital nature. The irretrievable contributions that are made by Company A, or a subsidiary member of the Company A income tax consolidated group, to the trustee of Company A EST are not capital or of a capital nature and will not satisfy paragraph 8-1(2)(a) of the ITAA 1997. | Detailed Reasoning - Apportionment: The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant, for example, in the circumstances where contributions made by Company A, or a subsidiary member of the Company A income tax consolidated group, to the trustee of Company A EST for the purposes of administering the Company A EST are instead used to subscribe for Company A shares. 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 the year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied by the trustee of an 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 way of the irretrievable cash contributions made to the trustee of Company A EST are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that any deduction would not need to be apportioned. | Detailed Reasoning - Other Negative Limbs: Nothing in the facts suggest that the irretrievable cash contributions made to the trustee of Company A EST are private or domestic in nature, or are incurred in gaining or producing exempt income or non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of either the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. The irretrievable cash contributions Company A, or any subsidiary member of the Company A income tax consolidated group, makes to the trustee of Company A EST to fund the acquisition of ordinary shares in accordance with the Company A EST Deed and Plan Rules are allowable deductions to Company A under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Company A will incur costs in relation to the establishment and implementation of the Company A EST, including the costs that are associated with applying for this private ruling. Company A will also incur further costs associated with the services provided by the trustee of the Company A EST in respect of the on-going administration and management of the Company A EST including, but not limited to, costs for: ● the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants); ● employee plan record keeping; ● production and dispatch of holding statements to employees; ● provision of annual income tax return information to employees; ● management of employee termination; and ● other trustee expenses, including the annual audit of the financial statements and annual income tax return of the Company A EST. Company A is obligated to pay any fees, commission or remuneration as agreed between Company A and the trustee of the Company A EST and reimburse any expenses properly incurred by the trustee of Company A EST as consideration for the trustee performing its obligations as trustee of the Company A EST. The costs incurred by Company A in relation to the implementation and on-going administration of the Company A EST are deductible under section 8-1 of the ITAA 1997 as either: ● costs incurred in gaining or producing the assessable income of Company A; or ● costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. ATO Interpretive Decision ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible (ATO ID 2014/42) considered the deductibility of costs incurred by an employer in administering an employee share scheme. ATO ID 2014/42 decided that such costs are part of the ordinary employee remuneration costs of the taxpayer and would be deductible under section 8-1 of the ITAA 1997. Consistent with the analysis in Question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Nothing in the facts suggest that the costs are private or domestic in nature, are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or ITAA 1997. Accordingly, Company A is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred by Company A in relation to the implementation and on-going administration of the Company A EST. | Detailed Reasoning - Question 3: A deduction under section 8-1 of the ITAA 1997 for a loss or outgoing would generally be allowable in the income year in which the loss or outgoing is incurred. However, under certain circumstances, the timing of a deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 states that if: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary’s employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contribution provided to a 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 - Subparagraph 83A-210(a)(i) of the ITAA 1997: The implementation of the Plan Rules as well as the provision of irretrievable cash contributions by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of Company A EST constitute an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997. | Detailed Reasoning - Subparagraph 83A-210(a)(ii) of the ITAA 1997: Subparagraph 83A-210(a)(ii) of the ITAA 1997 requires that money or other property is provided to another entity under an arrangement for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme. | Detailed Reasoning - ESS interest: The term ESS interest, in a company, is defined in subsection 83A-10(1) of the ITAA 1997 as being 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 Plan Rules an Award (other than Awards ultimately settled in cash) made to an Employee is an ESS interest as it is either a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share in a company (specifically, Company A). | Detailed Reasoning - Employee share scheme: The term ‘employee share scheme’ is defined in subsection 83A-10(2) of the ITAA 1997 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) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 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 Plan Rules constitute an employee share scheme for the purposes of subsection 83A-10(2) of the ITAA 1997 as it is a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (being each Participant) in relation to their employment in Company A. The scheme contains a number of interrelated components, such as: ● The making of an Offer for an Award under the Plan Rules; ● The provision of irretrievable cash contributions to the trustee of Company A EST; ● The allocation of Company A shares to each Participant in accordance with the Plan Rules and Company A EST Deed. Each interrelated component must be carried out so that the scheme can operate as intended. One of those components is the provision of irretrievable cash contributions by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of Company A EST. The irretrievable cash contributions enable the trustee of the Company A EST to acquire Company A shares for the purpose of enabling each Participant, indirectly as part of the Plan Rules, to acquire ESS interests. Section 83A-210 of the ITAA 1997 will apply to determine the timing of any deduction under section 8-1 of the ITAA 1997 for an irretrievable cash contribution made to the trustee of Company A EST where it is made before: a) a Participant acquires the beneficial interest in a share in Company A in accordance with the Plan Rules; or b) a Participant acquires the beneficial interest in a right to acquire a beneficial interest in a share in Company A in accordance with the Plan Rules. 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 in Company A, or beneficial interest in a right to acquire a beneficial interest in a share in Company A, is acquired by a Participant under the Plan Rules. 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 . Note: Section 83A-210 of the ITAA 1997 will not apply where Company A, or any subsidiary member of the Company A income tax consolidated group, makes irretrievable cash contributions to the trustee of Company A EST to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant ESS interests. In such a situation, the irretrievable contributions will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable cash contributions are made where relevant ESS interests are ultimately satisfied with Company A shares. | Detailed Reasoning - Indeterminate rights: Awards provided under the Plan Rules are indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because the Board of Company A has the power to either deliver a share in Company A or make a cash payment to a Participant equivalent to the Fair Market Value on the exercise of an Award. In these circumstances the relevant Award will not be a right to acquire a beneficial interest in a share unless and until the time when the Board of Company A determines that the Award will be satisfied by the provision of a share in Company A. Once determined by the Board of Company A, section 83A-340 of the ITAA 1997 will operate to treat the Award as though it had always been a right to acquire a beneficial interest in a Company A share. If irretrievable cash contributions are provided to the Company A EST before the Award is acquired (and the Award does subsequently become an ESS interest), section 83A-340 of the ITAA 1997 will operate to deem the Award to always have been an ESS interest. Where this occurs, section 83A-210 of the ITAA 1997 will apply (retrospectively) to modify the timing of the deduction claimed by Company A under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Award would be available to Company A in the income year in which the Participant acquired the Award. | Detailed Reasoning - Ordinary Income: Section 6-5 of the ITAA 1997 provides that a taxpayer’s assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of ‘income’ was considered 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) where it was said 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 an employee share scheme, the trustee of an employee share trust subscribes to the company for an issue of shares. The trustee of the employee share trust pays the full subscription price for the shares and the company receives a contribution of share capital. The character of the contribution of share capital received by Company A from the trustee of the Company A EST can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A issues a new share (or shares) to the trustee of the Company A EST. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds received by Company A, takes the character of share capital, and accordingly, will also be of a capital nature. This view is supported by the reasoning in ATO Interpretive Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when Company A receives subscription proceeds from the trustee of the Company A EST for the issue of a new share in Company A to satisfy an obligation to a Participant under the Plan Rules, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account, and will not be ordinary income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Section 20-20 of the ITAA 1997: Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and the amount can be deducted as a loss or outgoing in the current year or an earlier income year. Company A will receive an amount for the subscription of shares by the trustee of the Company A EST. There is no insurance contract in this case, so the amount received for the subscription of shares is not received by way of insurance. Further, the amount received for the subscription of shares is not received by way of an indemnity because the receipt does not arise under a statutory or contractual right of indemnity and the receipt is not in the nature of compensation. Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997. Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. So far as a deduction under section 8-1 of the ITAA 1997 is allowed for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The subscription for new Company A shares by the trustee of the Company A EST cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997. The receipt by Company A is received in return for issuing shares to the trustee of the Company A EST, it is not received as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997. The subscription proceeds received by Company A from the trustee of the Company A EST for issuing shares will not be an assessable recoupment under section 20-20 of the ITAA 1997. | Detailed Reasoning - Capital Gains Tax (CGT): Section 102-20 of the ITAA 1997 states that there is a capital gain or loss if, and only if, a CGT event happens. The relevant CGT events that may be applicable when the subscription proceeds are received by 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) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997 to the trustee of the Company A EST. CGT event D1 therefore does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. CGT event H2 therefore also does not happen. As no CGT event occurs, no amount will be assessable as a capital gain to Company A. | Detailed Reasoning - Question 5: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (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: 1. there must be a scheme within the meaning of section 177A of the ITAA 1936; 2. 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 3. 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. On the basis of an analysis of the three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, the whole or a part of, a deduction claimed by Company A for irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group, to the trustee of Company A EST to fund the subscription for, or acquisition on-market of, Company A shares. | Detailed Reasoning - Question 6: The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). It provides that the tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. Under the FBTAA 1986, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 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 (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit 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); Subsection 995-1(1) of the ITAA 1997 states that the expression an ‘employee share trust’ has the same meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial 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). | Detailed Reasoning - Paragraphs 130-85(4)(a) and (b) of the ITAA 1997: The beneficial interest in a share received by a Participant when an ordinary share in Company A is allocated to them under the terms of the Company A EST Deed is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees’ employment. The Plan Rules are an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which ESS interests are provided to employees in relation to the employee’s employment. Company A has established the Company A EST to acquire ordinary Company A shares and to allocate those shares to employees in order to satisfy ESS interests (Awards other than those ultimately settled in cash) held by those employees under the Plan Rules. The beneficial interest in each Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the Offers for Awards (other than those ultimately settled in cash) are made to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because: ● the trustee of Company A EST acquires shares in a company (specifically, Company A); and ● the Company A EST ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in Company A shares), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Company A EST Deed and Plan Rules. | Detailed Reasoning - Paragraph 130-85(4)(c) of the ITAA 1997: Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require the trustee of the Company A EST to undertake incidental activities that are a function of managing the Company A EST. 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 sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997: ● 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 to be merely incidental. The trustee of the Company A EST has, subject to the Company A EST Deed, the full power to do all things that a trustee is permitted to do by law in respect of the Company A EST, Plan Shares and Trust Assets. However, Company A and the trustee of the Company A EST have agreed that the Company A EST will be managed and administered so that it satisfies the requirements of subsection 130-85(4) of the ITAA 1997. Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as the trustee of the Company A EST is not permitted to participate in any activities which are not considered to be merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997. Consequently, irretrievable cash contributions made by Company A to the trustee of Company A EST are excluded from the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 by paragraph 136(1)(ha) of the FBTAA 1986. The irretrievable cash contributions will therefore not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. | Detailed Reasoning - Question 7: As explained in the response to question 6, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies. The Commissioner accepts the Plan Rules constitute an employee share scheme, that the Awards (other than those ultimately settled in cash) provided under the Plan Rules constitute ESS interests and that either Subdivision 83A-B or 83A-C of the ITAA 1997 will apply to those ESS interests. Accordingly, the provision of rights (other than those which relate to Awards ultimately settled in cash) pursuant to the Plan Rules will not be subject to FBT on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 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 1986. | Detailed Reasoning - The provision of Company A shares: As mentioned above, in general terms, ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA 1986 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 of Australia 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 (1988) 89 ATC 4051; (1988) 19 ATR 1901 (McArdle) 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 in McArdle 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 participates in the Plan Rules, they obtain a right (being a right to acquire a beneficial interest in a share in Company A) and this right constitutes an ESS interest. When this right is subsequently exercised by the employee, any benefit received would be in respect of the exercise of the right, 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 right under the Plan Rules (being the receipt 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 8: As mentioned in the answer to question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA of the ITAA 1936 or other general anti-avoidance rules to an arrangement, including in a private ruling. PS LA 2005/24 succinctly explains the operation of section 67 of the FBTAA 1986. Notably, paragraphs 145 – 148 of PS LA 2005/24 state: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. Paragraph 151 of PS LA 2005/24 states: 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. As discussed in the analysis in Question 6, irretrievable cash contributions made by Company A to the Company A EST will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. As a result, the FBT liability of Company A is not any less than it would have been but for the existence of the arrangement. The Commissioner will not make a determination that section 67 of the FBTAA 1986 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 of Company A EST to fund the subscription for, or acquisition on-market of, Company A shares.