Private ruling: Employee Share Scheme
Date of advice: 25 July 2017
Published: November 2017
Date scheme commenced: 01 July 2016

Ruling: Q1: Will Company A (the Taxpayer or 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 irretrievable cash contributions made by Company A or a subsidiary member of the Company A income tax consolidated group, to Trustee ( Trustee ) as Trustee of the Employee Share Trust (the Trust ) to fund the subscription for, or acquisition on-market of, ordinary Company A shares ( Shares ) to satisfy Employee Share Scheme ( ESS ) interests issued pursuant to the Company A Employee Incentive Plan ( Plan )? | A1: Yes. | Q2: Will the irretrievable cash contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A2: Yes. | Q3: Will the irretrievable contributions made by Company A (or a subsidiary member of the Company A income tax consolidated group), to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests issued pursuant to the Plan be deductible to Company A under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests? | A3: Yes. | Q4: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) applies to deny, in part or in full, a deduction claimed by Company A for the irretrievable contributions made to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan? | A4: No. The rulings for question 1 to 4 inclusive apply for the following periods: 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 Income tax year ended 30 June 2021 | Q5: Will the provision of rights, options and shares by Company A to employees and Directors of Company A and its subsidiaries (the Group ) under the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (Cth) ( FBTAA )? | A5: No. | Q6: Will the irretrievable cash contributions made by Company A or its subsidiaries to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A6: No. The rulings for question 5 and each apply for the following periods: Fringe benefits tax year ended 31 March 2018 Fringe benefits tax year ended 31 March 2019 Fringe benefits tax year ended 31 March 2020 Fringe benefits tax year ended 31 March 2021 Fringe benefits tax year ended 31 March 2022

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background Company background The Company A is listed on the Australian Securities Exchange (ASX). It is the head entity of a Tax Consolidated Group. Incentive plan Company A is focused on the attraction, motivation and retention of key employees and Directors of Company A and its wholly owned subsidiaries (the Group ). As part of this strategy, Company A established the Employee Incentive Plan ( EIP or Plan ) under which participants are granted rights ( Rights ) and/or options ( Options ) to acquire ordinary shares in the Company A Group. Entities in the Group are the Employing Entities and they may make contributions to the Trust in relation to their employees who participate in the Plan. While the Group has both foreign resident and Australian resident employees, this Ruling will only cover those employees who are Australian residents. Participants’ Rights may vest subject to the achievement of performance and/or service conditions, and on vesting are automatically exercised at no cost to the participant. Upon the exercise of Rights, participants are allocated one fully-paid Share for each Right that vests. Participants’ Options may vest subject to the achievement of performance and/or service conditions. Upon vesting, Options may be exercised by participants at the prescribed exercise price. Once Options are validly exercised and the prescribed exercise price is paid, participants are allocated one Share for each Option exercised. Shares allocated upon vesting of Rights or Options may be subject to restrictions whereby the participant is unable to deal with their Shares until the restriction is lifted. During this period, the Shares subject to restrictions will be held in the Trust. Company A has an employee rights and options plan: ● Employee Incentive Plan (EIP) Company A provided the EIP Rules. Employee Share Trust Company A established the Employee Share Trust ( Trust ) to administer the EIP. Company A will incur various costs in relation to the preparation and keeping of all necessary and proper records and accounts, transfer and other documents in connection with the affairs of, and transaction involving, the Trust. Company A provided the Employee Share Trust Deed (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 section 177C | Income Tax Assessment Act 1936 section 177CB | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 s ubsection 177F(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-325 | Income Tax Assessment Act 1997 section 83A-335 | Income Tax Assessment Act 1997 section 83A-340 | 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: 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. (1) 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) of the ITAA 1997 contributions made to the Trustee by Company A must be irretrievable and non-refundable. The terms of the Deed, as detailed in the ensuing paragraphs, when read together demonstrate that contributions made by Company A to the Trustee, excluding those provided by way of loan, will be irretrievable and non-refundable and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. Pursuant to the Deed, the Trustee must comply with any reasonable written instruction of the Board of Company A to subscribe for, purchase or accept Shares on behalf of a Participant, provided the Trustee has been provided with sufficient funds to comply with the request or direction. In accordance with the Deed, the Trustee holds these Shares on behalf of the Participants for the purposes of the relevant Plan Rules. 'Share’ is defined in the Deed to mean a share in the Company, which is in turned, defined as Company A. Under the Deed, Company A must provide to the Trustee all funds required by the Trustee to enable it to comply with its obligations to subscribe for or acquire Company A shares as directed. Under the Deed, no member of the Group has any entitlement to the funds provided to the Trustee at any time, thus preventing the repayment of funds received by the Trustee from the Group. Further, that upon termination of the Trust, the Trustee must transfer any Shares to one or more beneficiaries, at the discretion of the Trustee with regard to any request of the Board. Any remaining investments are to be sold or converted into money. The Trustee must apply any remaining assets held by the Trust to pay all outstanding debts and liabilities of the Trust with any surplus that remains distributed in a manner not inconsistent with the objects of the Trust. As noted above, the Deed prohibits the Trustee from distributing this surplus to the Group. 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 made only 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 either be 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). 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 EIP intend to reward, retain and motivate employees. It follows that the contributions made by Company A to the Trustee are part of the overall employee remuneration costs of Company A. All the documentation provided indicates that Company A makes the contribution to the Trust solely to enable the Trustee to acquire Company A shares for Participants according to the EIP Rules to remunerate and retain employees. Accordingly, a sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the Trust) and the derivation of Company A’s assessable income for the purposes of subsection 8-1(1) of the ITAA 1997. Capital or revenue? Company A will make periodic contributions to the Trustee of the Trust for the purpose of acquiring and subscribing for Shares in Company A pursuant to the EIP. 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 of the ITAA 1997. 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. | 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 in the circumstances where the Trustee of the Trust uses contributions made by Company A to the Trustee for the administration of the EIP 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 ITAA 1936 or ITAA 1997. Conclusion The irretrievable contributions Company A makes to the Trustee of the Trust to fund the acquisition of Shares in Company A, in accordance with the Deed and the EIP, will be an allowable deduction to Company A under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 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 of the ITAA 1997. Section 83A-210 of the ITAA 1997 provides that if: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary’s employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 of the ITAA 1997 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 EIP, 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) of the ITAA 1997. ESS interest An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the EIP, each right and option provided to a Participant under the EIP is an ESS interests as it is (or may later become) a right to acquire a beneficial interest in a Share, as described in paragraph 83A-10(1)(b), in a company (Company A). Employee share scheme Subsection 83A-10(2) of the ITAA 1997 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) 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 EIP is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it 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. Additionally, a Company A Share acquired by the Trustee to satisfy a right or option provided under an employee share scheme, to an employee in relation to the employee’s employment, is itself acquired as part of that same employee share scheme. Relevant connection The making of offers under the EIP, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of the EIP. 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 Shares is for the purpose of enabling Participants, indirectly as part of the EIP, 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 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance, the contribution will only be deductible to Company A in the income year when the relevant 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 Awards provided under the EIP are indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because either delivery of a Share or payment of a cash equivalent satisfies the right or option, at the discretion of the Board . They are not a right to acquire a beneficial interest in a Share unless and until the time when the Board determines the Awards will be satisfied by the provision of Company A Shares. Once determined, section 83A-340 of the ITAA 1997 operates to treat these Awards as though they had always been rights to acquire beneficial interests in Company A Shares. If irretrievable contributions are provided to the Trustee before these Awards are acquired (and the Awards do subsequently become ESS interests), then subsection 83A-340(2) of the ITAA 1997 operates to deem the Awards to always have been ESS interests. Where this occurs, section 83A-210 of the ITAA 1997 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Awards would be available to Company A in the income year in which Participants acquire the Awards. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . | Detailed Reasoning - Note: Where the Awards 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) of the ITAA 1997. | Detailed Reasoning - Question 3: As discussed in the analysis above, 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 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. Accordingly, section 83A-210 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A Shares after the acquisition of the relevant rights by the Participant. These irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made and where the relevant rights are ultimately satisfied with Company A Shares. | Detailed Reasoning - Question 4: 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 1. 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 2. 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 requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A 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 5: 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 EIP is an employee share scheme, that the rights provided under the EIP 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 EIP 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 the EIP, 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 the EIP (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 6: 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). Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 The beneficial interest in a share received by a Participant when a 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) 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 EIP are employee share schemes within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are schemes under which rights to acquire Shares in Company A (being ESS interests) are provided to employees in relation to the employees’ employment. Company A has established the Trust to acquire Shares in Company A and to allocate those Shares to employees in order to satisfy ESS interests acquired by those employees under the EIP. The beneficial interest in the Company A Security 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) of the ITAA 1997 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) of the ITAA 1997, being beneficial interests in the Shares of Company A), 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 Deed and the EIP. 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 that the Trustee undertake incidental activities that are a function of managing the EIP. 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. In the present context, the Deed requires the Trustee to administer and manage the Trust consistent with the definition of "employee share trust" for the purposes of section 130-85(4) of the Income Tax Assessment Act 1997 . Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the EIP. Conclusion The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as: ● the Trust acquires Shares in a company (being Company A); ● the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the Shares of Company A), 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 Deed and EIP; 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 the 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.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company A. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Questions 1 to 4 – application of the single entity rule in section 701-1of 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 a consolidated group are taken to be parts of the head company. Consequently, 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. Consequently, 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 1 to 4 – application of Division 83A to relationships similar to employment | Section 83A-325 of the ITAA 1997 provides that Division 83A of the ITAA 1997 applies to relationships similar to employment. | Directors or office holders who are not considered employees, but who are in an employee-like relationship are not excluded from participating in employee share scheme (Item 1 of the Table in section 83A-325 of the ITAA 1997). Therefore, directors of Company A (in relation to the EIP grant) are covered by Division 83A of the ITAA 1997. | References relating to employees in the explanation below will include directors for the purpose of this decision. | The SER in section 701-1 of the ITAA 1997 has no application to the Fringe Benefit Tax Assessment Act 1986 ( FBTAA ). Accordingly, the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A consolidated group in relation to questions 5 and 6.