Private ruling: Employee Share Scheme
Date of advice: 5 August 2016
Published: September 2016

Ruling: Q1: Will Company A, as head entity of the Company A 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 tax consolidated group to Company B (Trustee), as trustee of the Company A Australia Limited Employee Share Trust, to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee? | A1: Yes. | Q2: Will Company A as head entity of the Company A tax consolidated group be entitled to deduct an amount under section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A tax consolidated group in relation to the implementation and on-going administration of the Trust? | A2: Yes. | Q3: Will irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee, 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 contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: If the Trustee satisfies its obligations under the Employee Share Option Plan (ESOP) or the Company A Australia Long-term Incentive Plan (LTIP) by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997? | 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, in part or full, a deduction claimed by Company A as head entity of the Company A tax consolidated group for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee? | A5: No. The rulings for questions 1 to 5 inclusive each apply for the following periods: Income tax year ended 30 June 2016 Income tax year ended 30 June 2017 Income tax year ended 30 June 2018 Income tax year ended 30 June 2019 Income tax year ended 30 June 2020 | Q6: Will the provision of Performance Rights or Options under the ESOP or LTIP, or shares in Company A, to employees of Company A or the Company A tax consolidated group, be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A7: No . | Q7: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A or any subsidiary member of the Company A tax consolidated group, by the amount of the tax benefit gained from irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares? | A8: No. The rulings for questions 6 to 8 inclusive each apply for the following periods: Fringe benefits tax year ended 31 March 2016 Fringe benefits tax year ended 31 March 2017 Fringe benefits tax year ended 31 March 2018 Fringe benefits tax year ended 31 March 2019 Fringe benefits tax year ended 31 March 2020

Relevant facts and circumstances: Company A is the head entity of the Company A tax consolidated group which also includes Company C The Company A Australia Limited Long-Term Incentive Plan and Employee Share Option Plan Company A currently operates the Employee Share Option Plan (ESOP) and Company A Long-Term Incentive Plan (LTIP). Both the LTIP and the ESOP (collectively referred to as the Plans) are a key part of Company A's executive remuneration framework which aims to increase alignment of employee interests to shareholders' interests, drive improved business performance and attract and retain key talent. Each of the LTIP and the ESOP are supported by their respective plan rules, namely the Company A Share Option Plan Rules (ESOP Rules) and the Long term incentive plan rules Company A (LTIP Rules). The Plans presently apply to employees of Company C. Employees of Company C who participate in either the ESOP or LTIP become participants under the respective Plan in which they participate (Participants). The ESOP and LTIP will enable eligible Company A executives to share in the growth of Company A's business through a grant of Options under the ESOP or either Options or Performance Rights under the LTIP Rules. The Options and Performance Rights will be capable of being exercised and converted into ordinary shares following the satisfaction of certain vesting conditions over a three year period (LTIP) or 12 month period (ESOP). The Plans broadly operate as follows: • It is at the absolute discretion of the Board (defined in both the LTIP and ESOP Rules as being the Board of Company A) to extend an invitation to grant Options or Performance Rights to eligible employees. • Subject to the terms attaching to the Options or Performance Rights, each Option or Performance Right entitles the participant to one fully paid ordinary share in Company A (Company A share). Under the LTIP, at the Boards discretion under Clause 9.5 of the LTIP Rules the Options or Performance Rights may be settled for cash. In respect of Options granted under the ESOP, where permitted by the Board, the Participant pursuant to Rule 12.5 of the ESOP Rules may elect to receive the difference between the Market Value of shares (as defined in the ESOP Rules) and the Exercise Price (as defined in the ESOP Rules) in cash or shares. • Accordingly, once all conditions on the Options or Performance Rights, as determined by the Board have been satisfied, the vested Options or Performance Rights may be exercised and be settled into the equivalent number of shares (see Clause 8 of the LTIP Plan Rules and Clause 12 of the ESOP Rules). An Option or Performance Right will be forfeited in the circumstances set out in Clause 10 of the LTIP Rules and Clause 8 of the ESOP Rules, including failure to satisfy vesting conditions. • Options or Performance Rights are not transferrable without the consent of the Board. Company A Employee Share Trust By way of the Company A Australia Limited Employee Incentive Trust Deed (Deed), Company A has established an Employee Share Trust (Trust). The sole purpose of the Trust which is to acquire Company A shares for employees of Company A pursuant to the Plans (clause 4.9 of the Deed). By way of the Company A Australia Employee Incentive Trust Deed (Deed), Company A has established the Company A Australia Employee Incentive Trust (Trust). The sole purpose of the Trust is to acquire Company A shares for employees of Company A pursuant to the Plans so that the Trust meets the definition of 'employee share trust' for the purposes of s 130-85(4) of the ITAA 1997. Company B (Trustee) is an independent third party acting as the trustee of the Trust. The Trust will operate as follows: • The Trust will be funded by contributions from Company A for the purchase of Company A shares in accordance with the Plans (clause 5.3 of the Deed). • The funds contributed will be used by the Trustee to acquire Company A shares either on-market or via a subscription for new shares in Company A, based on written instructions from Company A (clause 5.2 of the Deed). • Company A shares acquired by the Trustee will be allocated to the relevant employees following exercise of the Performance Rights or Options (clause 9.3 of the Deed). • The Trustee can sell Company A shares on behalf of an employee where permitted to do so by the employee (clause 4.1(d) of the 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 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 s ubsection 177F(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Reasons for decision: All references are to the Income Tax Assessment Act 1997 unless otherwise stated. Questions 1 to 5 - application of the single entity rule in section 701-1. The consolidation provisions 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 the subsidiary members of a 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 they are members of the 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 Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by Company A as the Australian head company of the Company A tax consolidated group. Questions 6 to 8 The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986 ( FBTAA). Accordingly, the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A tax consolidated group in relation to questions 6 to 8. | Detailed Reasoning - Question 1: The general deduction provision in section 8-1 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. Losses or outgoings To claim a deduction under subsection 8-1(1) contributions made to the Trustee by Company A must be irretrievable and non-refundable. The Trustee must, on direction by the Board (clause 5.1(a) of the Deed), acquire Company A shares to enable Company A to satisfy its obligations under the terms of the relevant Plans. Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those Company A shares (clauses 5.2 and 5.3 of the Deed). If Company A makes a Bonus Issue (as defined in the Deed) in respect of a Participant's Allocated Shares (being Company A shares) held by the Trustee on behalf of a Participant, the Trustee must hold the bonus shares issued as Allocated Shares for that Participant and are deemed for the purposes of the Deed to have been credited to the Participant at the same time as the Allocated Shares (clause 7.5 of the Deed). The contributions made to the Trustee by Company A will be irretrievable and non-refundable to Company A in accordance with the Deed as all funds received by the Trustee from Company A will constitute Accretions (as defined in the Deed) to the corpus of the Trust and will not be repaid to Company A (clause 5.3(b)(i) of the Deed). Under clause 15.2 of the Deed, upon termination of the Trust the Trustee must distribute any consideration or Company A shares that the Trust has been directed to provide to Participants. The Trustee must liquidate any remaining assets and proceed to pay all outstanding debts and liabilities of the Trust. Any surplus that remains must be distributed to either another employee incentive trust or any charity with deductible gift recipient status. The Deed prohibits the Trustee distributing this surplus to any company in the Company A tax consolidated group Company (clause 15.3 of the Deed). The terms of the Deed when read together demonstrate that contributions made by Company A to the Trustee will be irretrievable and non-refundable and for the purposes of the Deed and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1). 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 or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. 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). Company A established the Trust for the sole purpose of facilitating the ESOP and LTIP (Recital A and clause 4.9 of the Deed). The contributions made by Company A to the Trustee of the Trust are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the ESOP and LTIP intend to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership. All the documentation provided indicates that Company A makes the contributions to the Trust solely to enable the Trustee to acquire Company A shares for Participants in accordance with the ESOP and LTIP Rules in order to remunerate and retain executives. Accordingly, it is considered that there is a sufficient nexus between the outgoings (contributions made by Company A to the Trustee) and the derivation of Company A assessable income. Capital or revenue? Company A will make periodic contributions to the Trustee of the Trust for the purpose of acquiring and subscribing for ordinary shares in Company A pursuant to the Plans. In ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1. 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 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature. Apportionment The combined operation of subsections 8-1(1) and 8-1(2) may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant in the circumstances where the Trustee of the Trust uses contributions made by Company A to the Trustee for the administration of the Plans to subscribe for shares in Company A. 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 the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer 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 secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Private or domestic in nature Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the Trust are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. Conclusion The irretrievable contributions Company A makes to the Trustee of the Trust to fund the acquisition of ordinary Company A shares in accordance with the Deed and the Plans will be an allowable deduction to Company A under section 8-1. | Detailed Reasoning - Question 2: Company A will incur costs in relation to the establishment and implementation of the Trust, 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 Trust in respect of the on-going administration and management of the Trust, including, but not limited to: • costs incurred in 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 Trust. In accordance with clause 4.3 of the Deed, the Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as trustee of the Trust. Company A may pay to the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as Company A and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 as either: • costs incurred in gaining or producing the assessable income of Company A; or • costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the analysis 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). Accordingly, Company A is entitled to an income tax deduction, pursuant to section 8-1, in respect of costs incurred by Company A or any subsidiary member of Company A tax consolidated group in relation to the implementation and on-going administration of the Trust. | Detailed Reasoning - Question 3: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 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 applies under an arrangement where there is a relevant connection between the irretrievable cash contributions, provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Arrangement The implementation of the ESOP and LTIP, establishment of the Trust and provision of money by Company A to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i). ESS interest An ESS interest in a company is defined in subsection 83A-10(1) as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the ESOP and LTIP, each Performance Right and Option provided to a Participant when an offer is made under the ESOP or LTIP is an ESS interest as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A). Employee share scheme Subsection 83A-10(2) defines 'employee share scheme' as: a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term 'scheme' as follows: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The ESOP and LTIP are each an employee share scheme for the purposes of Division 83A as each is an arrangement, which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to a Participant in relation to their employment in Company A in accordance with the Deed. A Company A share acquired by the Trustee to satisfy a right provided under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. Relevant connection The making of an offer under the ESOP or LTIP, the providing of Performance Rights or Options under them, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Company A shares by the Trustee and the allocation of Company A shares to Participants are all interrelated components of the Plans. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is for the purpose of enabling Participants, indirectly as part of the ESOP or LTIP, to acquire relevant rights (that is ESS interests). If Company A provides irretrievable contributions before a Participant acquires the relevant ESS interests, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance, the contribution will only be deductible to Company A in the income year when the relevant Performance Rights or Options (ESS interests) are provided to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . Indeterminate rights Performance Rights and Options provided under the Plans are indeterminate rights for the purposes of section 83A-340. That is because the option exists to either deliver a Company A share or make a payment of a cash equivalent to satisfy the Performance Right or Option, at the discretion of the Board. In this circumstance the Performance Right or Option is not a right to acquire a beneficial interest in a share unless and until the time when the Board determines the Performance Rights or Options will be satisfied by the provision of Company A shares. Once determined, section 83A-340 operates to treat these Performance Rights or Options as though they had always been rights to acquire beneficial interests in shares. If irretrievable contributions are provided to the Trustee before these Performance Rights or Options are acquired (and the Performance Rights and Options do subsequently become ESS interests), then section 83A-340 operates to deem the Performance Rights and Options to always have been ESS interests. Where this occurs, section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1. In such a case, a deduction to fund the exercise of the Performance Rights and Options would be available to Company A in the income year in which Participants acquire the Performance Rights or Options. | Detailed Reasoning - Note: Where the Performance Rights and Options do not become ESS interests because they are ultimately satisfied in cash, the outgoing should not flow through the Trust. This is because the Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) in those circumstances. As discussed in the analysis above, section 83A-210 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant Performance Rights or Options. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made. | Detailed Reasoning - Question 4: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was 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). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an employee share scheme, where the trustee subscribes to the 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 contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A is issuing the Trustee with a new share in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when Company A receives subscription proceeds from the Trustee of the Trust where the Trustee has subscribed for new shares in Company A to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and it will not be 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 of the Trust. There is no insurance contract in this case, so the amount is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. Subsection 20-20(3) 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. Subsection 20-25(1) 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. To the extent that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by Company A is in return for issuing shares to the Trustee of the Trust, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30. The subscription proceeds will therefore not be an assessable recoupment under section 20-20. Capital Gains Tax (CGT) Under section 102-20, you make 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 event D1 (creating a contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. As Company A is issuing shares, being equity interests as defined in section 974-75, to the Trustee of the Trust neither CGT event D1 nor CGT H2 will happen. Conclusion When the Trustee of the Trust satisfies its obligations under the Deed by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 and will also not trigger a CGT event under Division 104. | 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 these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A. | 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) which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. Under the FBTAA, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided. Without the provision of a 'fringe benefit', no amount will be subject to FBT. In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The provision of rights Certain benefits however are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA. Paragraph (f) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 ; or 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 that the ESOP and LTIP are each employee share schemes, that the rights provided under them are, or may later become in the case of indeterminate rights, ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the provision of rights pursuant to the Plans will not be subject to fringe benefits tax either on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA or on the basis that they are a payment of salary or wages (in the case of rights which are ultimately satisfied with cash) and are thereby excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits). The provision of Company A shares As mentioned above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material , rather than a , causal connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee of Company A or its subsidiaries participates in one of the Plans, 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, 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 vested right under one of the Plans (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. | Detailed Reasoning - Question 7: 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) states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4). Subsection 130-85(4) states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial 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). Paragraphs 130-85(4)(a) and (b) The beneficial interest in a share received by a Participant when an ordinary share in Company A is provided to them under the terms of the Deed is an ESS interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) 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 ESOP and LTIP are each employee share schemes within the meaning of subsection 83A-10(2) because they are schemes under which rights to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment. Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the Plans. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights are provided to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) are therefore satisfied because: • the Trust acquires shares in a company, namely Company A; and • the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and Plans. Paragraph 130-85(4)(c) Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Plans. 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): • 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. Under Clause 4.9 of the Deed: …the Company and the Plan Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA. Paragraph 130-85(4)(c) is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the Plans. Conclusion The Trust satisfies the definition of an employee share trust in subsection 130-85(4) as: • the Trust acquires shares in a company (being Company A); • the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and Plans; and • the Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Trust. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA therefore excludes the contributions to the Trustee from being a fringe benefit. Accordingly, the irretrievable cash contributions made by Company A or any subsidiary member of Company A tax consolidated group to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares, will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | 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 or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA. Notably, paragraphs 145 - 148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA 1986. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA 1986 is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA 1986 is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA 1986 provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of 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 1986. The provision of benefits to the Trustee as irretrievable contributions to the Trust, and to Participants as rights (Performance Rights or Options) under the Plans (and the Company A shares received on their vesting) are excluded from the definition of a fringe benefit for the reasons given in questions 6 and 7 above. As these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable by using the Trust arrangement. As there would be no fringe benefits tax payable without the use of the Trust (and nor likely would fringe benefits tax be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement. 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, or any subsidiary member of Company A tax consolidated group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A.

Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares, constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | These reasons for decision accompany the Notice of private ruling for Company A Australia Limited.