Private ruling: Employee share plans
Published: July 2012
Ruling period: Income tax years ended: | 30 June 2013 | 30 June 2014 | 30 June 2015 | 30 June 2016 | 30 June 2017 | Fringe benefits tax years ended: | 31 March 2013 | 31 March 2014 | 31 March 2015 | 31 March 2016 | 31 March 2017

Ruling: Q1: Will Company A obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by Company A to the Trustee of the employee share trusts (ESTs) to fund the subscription for or acquisition on-market of Company A shares by the ESTs? | A1: Yes. | Q2: Will Company A obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the ESTs? | A2: Yes. | Q3: Are irretrievable cash contributions made by Company A to the Trustee of the ESTs, to fund the subscription for or acquisition on-market of Company A shares by the ESTs to satisfy ESS interests, deductible to Company A at a time determined by section 83A-210 of the ITAA 1997 where the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: If an EST satisfies its obligation under any of the Employee Share Plans 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 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, in part or full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the ESTs to fund the subscription for or acquisition on-market of the company's shares by the ESTs? | A5: No. | Q6: Will the provision of rights and shares to Company C employees under any of the Employee Share Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A6: No. | Q7: Will the irretrievable cash contributions made by Company A to the Trustee of the ESTs, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA? | A7: No. | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee of the ESTs, to fund the subscription for or acquisition on-market of Company A shares? | A8: No.

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. Company A is an Australian listed company. Company A has established and operates a number of employee share plans, specifically: · Plan A which is governed by the Plan A Rules; · Plan B which is governed by the Plan B Rules; and · Plan C which is governed by the Plan C Rules. The above employee share plans are collectively referred to, when required for the purposes of this ruling, as the Employee Share Plans. Company A has also established a number of trusts for the purposes of operating the Employee Share Plans: · Plan A Trust which is established by a trust deed titled Plan A Trust Deed; · Plan B Trust which is established by a trust deed titled Plan B Trust Deed; and · Plan C Trust which is established by a trust deed titled Plan C Trust Deed. The above trusts are, when required, collectively referred to for the purposes of this ruling as the ESTs. The trustee for each of the ESTs is the same entity, Company B (Trustee). Company A has formed a tax consolidated group with each of its 100% owned Australian subsidiary companies. As such, contributions made to the ESTs will be treated as contributions made by Company A itself for Australian income tax purposes rather than by a subsidiary of Company A. All participants in the Employee Share Plans are employed by Company C as trustee of the Company A Unit Trust. Company C is a wholly owned subsidiary of Company A and the sole beneficiary of the Company A Unit Trust is Company A. The Trustee of the ESTs is an independent party which is in the business of acting as trustee for company share plan trusts in return for arm's-length remuneration. Plan A Company A has advised that Plan A operates as follows: Certain eligible executives will be invited to participate. Eligible executives will receive rights to acquire shares (Performance Rights) for nil consideration provided certain performance criteria are met during the relevant performance period of 3 years. All eligible executives who fail to meet the performance criteria will forfeit their Performance Rights. Each Performance Right automatically converts into one ordinary share in Company A (Performance Share), without the need for the Performance Right to be exercised. Company A will not pre-fund the Plan A Trust in the future. Rather, at the date that all performance criteria are satisfied, Company A will provide funds to the Plan A Trust to facilitate either the acquisition of Company A shares on-market or subscription for shares in Company A. The amount of the cash contributions made by Company A is equal to the fair market value of shares to be acquired by the Plan A Trust, the executives not being required to pay any amount for the Performance Shares. Performance Shares are acquired for the executives and will then be held during a holding period on behalf of the executives in the Plan A Trust. The holding period is the period from the date of acquisition of the shares by the trustee of the Plan A Trust, and ending on the date when the shares vest in the executive, or are otherwise forfeited, whichever is the earlier. The executive may not sell, transfer, mortgage, charge or otherwise dispose of, deal with, grant any interest in or encumber any interest in any shares allocated to the executive during the holding period (that is, while the shares are held by the Trustee of the Plan A Trust). During the holding period, executives will be entitled to any dividends and voting rights, as well as bonus shares and rights issues, attached to their allocated Performance Shares. The executive will forfeit his or her Performance Shares held by the Plan A Trust during the holding period where an executive commits an act of Gross Misconduct. The Performance Shares vest in the executive at the earliest of: · The date that the Committee (comprising those persons nominated and appointed by resolution of the Board from time to time to administer the Employee Share Plans) approves the executive's notice of withdrawal to have the Performance Shares vest in the executive personally; · The executive ceasing to be a full-time or permanent part-time employee; · The date that the Committee determines that the Performance Shares will vest in the executive; or · 10 years from the date that the Performance Rights were granted to the executive. Administration of the plan is vested in the Committee. Variation to the Performance Plan Rules and also the Plan A Trust Deed can be made by the Committee subject to approval of the Trustee. Plan B Company A has advised that Plan B operates as follows: Full-time and permanent part-time employees residing in Australia will be invited to participate. Under Plan B, employees may be offered either Award Shares or Purchased Shares. Award Shares are offered at no cost, whereas Purchased Shares may be purchased by the employee by sacrificing salary or bonus payments. Shares granted to employees as either Award Shares or Purchased Shares will be held during the holding period on behalf of the employee in the Plan B Trust. The holding period is the period from the date of acquisition of the shares by the Trustee of the Plan B Trust, and ending on the date when the shares vest in the employee, or are otherwise forfeited, whichever is the earlier. The employee may not sell, transfer, mortgage, charge or otherwise dispose of, deal with, grant any interest in or encumber any interest in any shares allocated to the employee during the holding period (that is, while the shares are held by the Trustee in the Plan B Trust) The Purchased Shares will vest in the employee at the earliest of: · The Committee approving an employee's notice of withdrawal to have the shares vest in the employee personally; · The employee ceasing to be employed on a full-time or permanent part-time basis by Company A; or · The 10th anniversary of the date of acquisition of the shares by the employee. The Award Shares will not vest in the employee before the expiry of a 3-year minimum restriction period, beginning on the date of acquisition of the award shares by the employee. Following the expiry of the 3-year minimum restriction period, the Award Shares will vest in the employee at the earliest of: · The Committee approving an employee's notice of withdrawal to have the shares vest in the employee personally; · The employee ceasing to be employed on a full-time or permanent part-time basis by Company A; · The date on which the Committee determines in its discretion that the Award Shares will vest in the employee; or · The 10th anniversary of the date of acquisition of the shares by the employee. During the period that the shares are held in the Plan B Trust, employees will be entitled to any dividends and voting rights attached to their allocated shares, as well as bonuses and rights issues. Company A will not pre-fund the Plan B Trust in the future for the purposes of acquiring either Award Shares or Purchased Shares. Rather, on acceptance of an eligible employee's application for either Award Shares or Purchased Shares, Company A will provide funds to the Plan B Trust to facilitate either the acquisition of Company A shares on-market or subscription for shares in Company A. The employee will forfeit his or her Award Shares or Purchased Shares held by the Plan B Trust during the holding period where an employee commits an act of Gross Misconduct. Employee participation is limited such that an executive does not hold a legal or beneficial interest in more than 5% of total issued capital of Company A. Administration of the plan is vested in the Committee. Variation to the Plan B Rules and the related trust deed can be made by the Committee subject to approval of the Trustee. Plan C Company A has advised that Plan C operates as follows: All employees of Company A and its controlled entities were eligible to participate in Plan C subject to an offer being made to the employee by the Committee of Company A setting out the relevant terms. Under Plan C employees may be offered rights to acquire shares in Company A (Share Rights). Each Share Right granted was subject to a 3 year performance period. The end of the performance period for employees' granted the last offer of Share Rights under Plan C was 1 July 2010. Company A granted shares upon vesting of the Share Rights to the Plan C Trust (held for the benefit of the eligible employees) upon the completion of the performance period. The shares were acquired by the Plan C Trust upon the employee lodging a completed Exercise Notice with the Company Secretary or such other person as the Committee designates in order for the employee to be granted shares (subject to the satisfaction of the relevant employment and exercise criteria). Unexercised Share Rights will lapse on 1 July 2013 or at the termination of the employee's employment. Each Share Right was granted for nil consideration and once vested and exercised converts into one ordinary share in Company A. The shares are not subject to any restrictions once acquired by the Plan C Trust, such as forfeiture or sale restrictions. The employee can withdraw his or her shares from the Plan C Trust at any time by lodging a written notice of withdrawal to the Committee. Company A will not pre-fund the Plan C Trust. Rather, at the date that the share rights are exercised, Company A will provide funds to the Plan C Trust to facilitate either the acquisition of Company A shares on-market or subscription for shares in Company A. The amount of the cash contributions made by Company A will be equal to the fair market value of Company A shares to be acquired by the Plan C Trust, the employees not being required to pay any amount for the shares. The Committee has a broad power to amend the Plan C Rules with consent of participants only required where the amendment would prejudicially affect the rights of such participants in respect of rights or shares acquired as a result of the exercise of such rights.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 20-20 | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 83A-35 | Income Tax Assessment Act 1997 Section 83A-205 | Income Tax Assessment Act 1997 Section 83A-210 | Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Section 102-25 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 104-155 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1936 Section 139DB | Income Tax Assessment Act 1936 Section 139E | Income Tax Assessment Act 1936 Section 177A | Income Tax Assessment Act 1936 Section 177C | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 177F | Income Tax (Transitional Provisions) Act 1997 Section 83A-5 | Income Tax (Transitional Provisions) Act 1997 Section 83A-10 | Fringe Benefits Tax Assessment Act 1986 Section 67 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It states that: 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. Subsection 8-1(2) of the ITAA 1997 then states: 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: Pursuant to the Plan A Trust Deed, Plan B Trust Deed and Plan C Trust Deed in the event that shares are to be acquired for the benefit of employees the cost of acquiring those shares must be contributed into the ESTs by Company A. Pursuant to the Plan A Trust Deed, Plan B Trust Deed and Plan C Trust Deed the ESTs will acquire and hold shares for the benefit of participants. Pursuant to the Plan A Trust Deed, Plan B Trust Deed and Plan C Trust Deed contributions made to the ESTs will be exclusively for the acquisition of shares. These provisions make it clear that contributions made to the ESTs will be irretrievable and non-refundable to Company A and therefore are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. | Detailed Reasoning - Relevant nexus: The Plan A Rules, Plan B Rules and Plan C Rules establish that the purpose of Company A in establishing and making irretrievable contributions to the ESTs is to provide benefits to certain eligible employees in the form of shares, provided certain conditions are satisfied. The contributions made by Company A to the ESTs for these purposes are part of the overall employee remuneration costs of Company A. Ultimately, the benefits provided to employees are designed to drive continuing improvement, encourage employee retention and to align the rewards and interests of eligible employees with the longer term growth and success of Company A. Accordingly, a sufficient nexus exists between the outgoings (being the contributions made to the ESTs) and the derivation of assessable income ( Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113; Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290; Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; and Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344). | Detailed Reasoning - Capital or revenue?: Company A will make recurring contributions from time to time to the ESTs as and when Company A shares are to be subscribed for or acquired pursuant to the Employee Share Plans. 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 ( Pridecraft ) it was determined that payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. In ATO ID 2002/1074 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. Contributions made by Company A to the ESTs for the purposes of administering the Employee Share Plans are outgoings incurred by the company in carrying on its business and are not capital in nature. Nothing in the facts suggests that contributions made by Company A to the ESTs 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 the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As discussed in question 1 above, section 8-1 of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Company A will incur costs associated with the services provided by the Trustee of the ESTs and has incurred various implementation costs. These costs are part of the ordinary recurring cost to Company A of remunerating its employees and are therefore deductible under section 8-1 of the ITAA 1997. This is consistent with the ATO view expressed in ATO Interpretative Decision 2002/961. However, it is noted that, unlike the irretrievable contributions made to the ESTs to acquire shares, these payments do not form part of the corpus of the ESTs, but are assessable income of the Trustee. | Detailed Reasoning - Detailed reasoning: Section 83A-210 of the ITAA 1997 states: If: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purposes 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 purposes 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. | Detailed Reasoning - Arrangement: The adoption of each of the Employee Share Plans and their respective plan rules and employee share trusts, constitutes an arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and the provision of money to the Trustee necessarily allows each scheme to proceed. | Detailed Reasoning - Acquiring an ESS interest '…directly or indirectly...': An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A-10(2) of the ITAA 1997). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997). | Detailed Reasoning - Rights granted under the Plan A and Plan C: By the operation of subsection 83A-20(2) of the ITAA 1997, a taxpayer does not acquire a share under an employee share scheme where the share is acquired as a result of the exercise of a right acquired under an employee share scheme. Under Plan A and Plan C, a participant will acquire a right under an employee share scheme because the conditions of section 83A-10 of the ITAA 1997 are satisfied. Accordingly, shares acquired by participants as a result of exercising their rights are not acquired under an employee share scheme and section 83A-210 of the ITAA 1997 will only apply if there is the relevant connection between the contributions made by the company and the acquisition of rights by the participants under Plan A and Plan C. The deductibility of money provided to employee share trusts is considered in ATO ID 2010/103. The facts described in that ATO ID 2010/103 are comparable to the present Plan A and Plan C and therefore, the reasoning in it is relevant to them as explained immediately below. Performance Rights and Share Rights granted to an employee under Plan A and Plan C respectively will be ESS interests as each of these rights represents a right to acquire a beneficial interest in a share in a company. These ESS interests will also be granted under an employee share scheme as they are granted in relation to the employee's employment. A share acquired by the Trustee to satisfy a right to acquire a share, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme. The granting of the beneficial interests in the Performance Rights and Share Rights, the provision of the money to the Trustee under the arrangement (each of Plan A and Plan C), the acquisition and holding of shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of Plan A and Plan C. All the components of these schemes must be carried out so that the schemes can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the schemes to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the participating employees, indirectly as part of Plan A and Plan C, to acquire rights. | Detailed Reasoning - Award Shares and Purchased Shares granted under Plan B: Award Shares and Purchased Shares granted to an employee under Plan B will be ESS interests as each of these awards represents a beneficial interest in a share in a company. Under the Plan B Trust, Award Shares and Purchased Shares granted to employees will be held on behalf of the employee in the Plan B Trust during the holding period. The holding period is the period from the date of acquisition of the shares by the trustee of the Plan B Trust, and ending on the date when the shares vest in the employee, or are otherwise forfeited, whichever is the earlier. Under these circumstances the provisions of section 83A-210 of the ITAA 1997 apply directly to the acquisition of Award Shares and Purchased Shares as these shares are acquired directly under an employee share scheme - that is, they are not acquired as a result of the exercise of rights to acquire shares which were first acquired under an employee share scheme. | Detailed Reasoning - Timing - acquisition time: Contribution made in an income year prior to the income year that Performance Rights, Share Rights, Award Shares and Purchased Shares are acquired The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Performance Rights and Share Rights or Award Shares and Purchased Shares (that is, the ESS interests) are granted to participants. Accordingly, when Company A makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for these ESS interests occurs, it will be allowed a deduction pursuant to section 83A-210 of the ITAA 1997 in the later income year in which these ESS interests are granted (acquired). It should be noted that if any amount of money is provided to the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of rights under Plan A and Plan C or future award of Award Shares or Purchased Shares under Plan B, the excess payment will occur before the employees acquire the relevant Performance Rights and Share Rights and Award Shares and Purchased Shares (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to Company A in the later year of income when these ESS interests are subsequently granted to (acquired by) participants. | Detailed Reasoning - Contribution made after the income year in which the Performance Rights, Share Rights, Award Shares and Purchased Shares are acquired: Section 83A-210 of the ITAA 1997 will not apply if Company A makes cash contributions in an income year that is later than the income year in which the Performance Rights and Share Rights or Award Shares and Purchased Shares are granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is properly incurred i.e. in the later income year. | Detailed Reasoning - Contribution made in the same year the Performance Rights, Share Rights, Award Shares and Purchased Shares are acquired: Section 83A-210 of the ITAA 1997 will still apply to determine the timing of the deduction for the contribution if the contribution is made in the same year as, but before the Performance Rights and Share Rights or Award Shares and Purchased Shares are acquired. In this case, the deduction is not available until these ESS interests are acquired. Company A will therefore be entitled to the deduction in the year the contribution is made as this is also the same year the Performance Rights and Share Rights or Award Shares and Purchased Shares are acquired. If the contribution is made in the same year as, but after the Performance Rights and Share Rights or Award Shares and Purchased Shares are acquired, then section 8-1 of the ITAA 1997 alone will apply. Under section 8-1 of the ITAA 1997, the contribution will be deductible in the same income year the Performance Rights and Share Rights or Award Shares and Purchased Shares were acquired as this is also the income year in which the loss or outgoing was incurred. | Detailed Reasoning - Ordinary Income: Section 6-5 of the ITAA 1997 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Chief Justice Jordan in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. Chief Justice Jordan considered that: 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. The 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 GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (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. They further stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In accordance with an employee share scheme, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by Company A from the Trustee of the ESTs can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company A is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. Accordingly, when Company A receives subscription proceeds from the Trustee of the ESTs where the ESTs have 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 not 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 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 ESTs. 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) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997. Recoupment is defined to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a 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. However, it can be argued that in subscribing for new shares in Company A the ESTs are acquiring new shares in Company A. This cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997. The receipt by Company A is made in return for issuing shares to the ESTs, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes to which section 20-30 of the ITAA 1997 will apply. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997. | Detailed Reasoning - Capital Gains Tax: Section 102-20 of the ITAA 1997 states that you make a capital gain or loss, if and only if a CGT event happens. No CGT events occur when the ESTs satisfy their obligations under the Employee Share Plans by subscribing for new shares in Company A. 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, therefore CGT event D1 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. Therefore, CGT event H2 does not occur. Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A. Therefore, when the ESTs satisfy their obligations under the Employee Share Plans 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 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are: · there must be a scheme within the meaning of section 177A of the ITAA 1936; · a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936; and · having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. | Detailed Reasoning - The Scheme: A 'scheme' is defined in subsection 177A(1) of the ITAA 1936 which states: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct. The establishment of the Employee Share Plans and ESTs as well as the payment of irretrievable cash contributions to the Trustee is a 'scheme' for the purposes of subsection 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax Benefit: A 'tax benefit' is defined in subsection 177C(1) of the ITAA 1936 of which the relevant paragraph is: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; In order to determine the tax benefit that would be derived by Company A from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. The taxpayer considers that if the scheme had not been entered into then rather than making payments to the ESTs Company A may have simply bought shares for employees on market via a broker (subject to company law requirements). Company A would not obtain a deduction for contributions made to the employee share trust as they do under the implemented scheme, as no employee share trust would exist. However, Company A would still likely be entitled to a deduction for any payments made to a broker for the purposes of buying shares on market. If Company A issued new shares directly to employees they may not receive a deduction for the amount incurred in issuing the shares. Therefore by using the ESTs, a tax benefit is created through the deduction they will receive for the irretrievable cash contributions they make to the Trustee under section 8-1 of the ITAA 1997. The taxpayer concurs that the relevant tax benefit in the present case is where Company A receives an income tax deduction arising from the payment of amounts to the Trustee. | Detailed Reasoning - Dominant Purpose: Paragraph 177D(b) of the ITAA 1936 sets out the following factors that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit: · the manner in which the scheme was entered into or carried out · the form and substance of the scheme · the time at which the scheme was entered into and the length of the period during which the scheme was carried out · the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme · any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme · any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme · any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out · the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi). Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) is between the scheme as proposed and the relevant counterfactual. | Detailed Reasoning - (i) The manner in which the scheme was entered into or carried out: The inclusion of the ESTs in the scheme give rise to a tax benefit, but the taxpayer contends that the presence of the ESTs provide other commercial benefits. In particular, it is stated in the application that benefits include, amongst other things: Capital management flexibility as it provides a streamlined approach to using contributions received from Company A and employees to either acquire shares in Company A on market (in a more convenient manner than if no trust was used) or alternatively to subscribe for new shares in Company A. This provides flexibility as circumstances change in how shares are sourced for provision to employees. Administrative efficiency as it provides a single arm's length vehicle to facilitate the provision of shares to employees under the Plan. This is increasingly important as Company A continues to expand operations and employee numbers in future years. The application also provides that the establishment of the ESTs will assist Company A to meet requirements in relation to dealing in its own shares and insider trading under the Corporations Act 2001. Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the company's income year nor with a large up-front payment intended to provide for the ESTs operations for several years into the future, as happened in Pridecraft . Rather, as the taxpayer states in the private ruling application, Company A will fund the ESTs on a recurring basis as the need arises. It is accepted that the ESTs provide benefits to the operation of the scheme that would not be available if Company A bought shares for employees on market via a broker (subject to company law requirements). | Detailed Reasoning - (ii) The Form and Substance: The substance of the scheme is the provision of remuneration in the form of shares to eligible employees who participate in the Employee Share Plans (as well as any employees who participate in future employee share plans). It takes the form of payments by Company A to the Trustee of the ESTs who acquire shares and transfers them to participants. While the existence of the ESTs confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. Company A has argued that the form of the arrangements with the ESTs provides a number of non-tax benefits and this is accepted. | Detailed Reasoning - (iii) The Timing of the Scheme: As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to the company nor with a contribution sufficiently large to fund the ESTs for several years. There is nothing in this factor to suggest that a dominant purpose of entering into the scheme was to obtain a tax benefit. | Detailed Reasoning - (iv) The Result of the Scheme: The result of the scheme is to provide Company A with allowable deductions for the contributions it makes to the ESTs. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. | Detailed Reasoning - (v) Any Change in the Financial Position of the Company: As noted above, Company A makes irretrievable contributions to the ESTs and those contributions constitute a real expense with the result that the company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with the ESTs as part of the scheme than would be the case if the company provided shares to participants by acquiring them on market via a broker (subject to company law requirements), there is nothing artificial, contrived or notional about the expenditure incurred by Company A. | Detailed Reasoning - (vi) Any Change in the Financial Position of other Entities or Persons: The contributions by Company A to the ESTs will form part of the corpus of the ESTs and must be dealt with by the Trustee in accordance with the terms of the relevant trust deed (i.e. exclusively for the acquisition of shares to provide to participants in the employee share schemes). The company is not a beneficiary of the ESTs and as the company will not pre-fund the ESTs, its contributions cannot be returned to it in any form except where the Trustee acquires shares from the company by subscribing for new issues at market value. Therefore, the contributions made by the company amount to a real change to the financial position of the Trustee. The financial position of participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes. | Detailed Reasoning - (vii) Any Other Consequence: Not relevant to these schemes. | Detailed Reasoning - (viii) The Nature of any Connection between the Company and any Other Persons: The relationship between Company A and the participants in the scheme is one of employer and employee. The Trustee of the Employee Share Plans is independent of the company and is under a fiduciary obligation to act in the interests of the employees who participate in the Employee Share Plans. The contributions made by the company to the Trustee are commensurate with the company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. There is nothing to suggest that the parties to the Employee Share Plans are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit. | Detailed Reasoning - Conclusion: Objective consideration of all eight matters contained in paragraph 177D(b) of the ITAA 1936 supports a conclusion that the 'dominant purpose' of the taxpayer and of the other persons who entered into the 'scheme' was not to obtain a 'tax benefit'. The Commissioner will not make a determination under section 177F of the ITAA 1936 in respect of Company A, to deny, in part of full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A to the Trustee of the ESTs to fund the subscription for or acquisition on-market of the company's shares. | Detailed Reasoning - Provision of Performance Rights, Share Rights, Award Shares and Purchased Shares: An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. 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 (h) of the definition of 'fringe benefit' 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. Subsection 83A - 10(1) defines an ESS interest as: 83A - 10(1) An ESS interest, in a company, is a beneficial interest in: · a share in the company · a right to acquire a beneficial interest in a share in the company Subsection 83A - 10(2) defines an employee share scheme as: 83A - 10(2) An employee share scheme is a scheme under which ESS interests in a company are provided to employees, or associates of employees, including past or prospective employees of: · the company, or · subsidiaries of the company · in relation to the employees employment. Company A has stated that it will grant ESS interests to participants under the Employee Share Plans, namely Performance Rights and Share Rights under Plan A and Plan C respectively, and Award Shares and Purchased Shares under Plan B. These ESS interests offered to participants under the Employee Share Plans are offered at a discount (as there is no consideration paid for them) and in connection with the participants employment. It is therefore accepted that the Employee Share Plans described in this private ruling comprise employee share schemes and incorporate the use of trusts that are employee share trusts within the meaning of subsection 130-85(4) of the ITAA 1997 (see explanation of employee share trust at question 7 below). Accordingly, the acquisition of ESS interests pursuant to the Employee Share Plans will not be subject to FBT on the basis that they are part of an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 will apply) and are thereby excluded from the definition of 'fringe benefit' by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. | Detailed Reasoning - The provision of shares upon exercise of Performance Rights and Share Rights: As stated above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402. The court at page 410 said: 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, casual 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) 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. The full Federal Court 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 accepts to participate in Plan A or Plan C, they obtain 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. Therefore, the benefit that arises to an employee upon the exercise of a right under Plan A or Plan C (that is, 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 - Detailed reasoning: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 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); | Detailed Reasoning - Employee Share Trust: An employee share trust is defined in subsection 995-1(1) of the ITAA 1997 as having the 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: · obtaining shares or rights in a company; and · 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: · the company; or · a subsidiary of the company; and · 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 upon grant of Award Shares or Purchased Shares and the right to acquire a share and the beneficial interest in a share (that is acquired pursuant to the exercise of the right granted under Plan A and Plan C) are ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. An 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) in relation to the employees' employment. Each employee share plan comprising the Employee Share Plans is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which Award Shares and Purchased Shares and Performance Rights and Share Rights (being rights to acquire shares in the company - Company A) are provided to employees in relation to the employee's employment. Under the Employee Share Plans, the employer has established the ESTs to acquire shares in the company and to allocate those shares to employees to satisfy the ESS interest acquired under the Employee Share Plans. Further, in respect of Plan A and Plan C the beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: · the EST acquires shares in a company, namely Company A; and · the EST ensures that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, are provided under an ESS (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the governing documents of each of the schemes. | 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 that the Trustee undertake incidental activities that are a function of managing the employee share plans and administering the ESTs. The Commissioner considers that for the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, include: · the opening and operating of a bank account to facilitate the receipt and payment of money; · the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to an 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 purpose 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; or · receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. Provisions within the Plan A Trust Deed, Plan B Trust Deed and Plan C Trust Deed collectively make it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the Employee Share Plans. To this end, all other duties/general powers listed in each of the Trust Deeds are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares for the sole benefit of participants in accordance with the Employee Share Plans. | Detailed Reasoning - Conclusion: Each employee share trust comprising the ESTs is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the ESTs in acquiring and providing ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. Accordingly, as paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the ESTs from being a fringe benefit, Company A will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the ESTs to fund the acquisition of Company A shares in accordance with the Plan A Trust Deed, Plan B Trust Deed and Plan C Trust Deed. | Detailed Reasoning - Detailed reasoning: Section 67 of the FBTAA is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA of the ITAA 1936 as it requires identification of an arrangement, a tax benefit obtained by the employer that was the sole or dominant purpose for a person entering into the arrangement and it is activated by the making of a determination by the Commissioner. Law Administration Practice Statement 2005/24 provides guidance on the application of section 67 of the FBTAA 1986. Paragraphs 145-148 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 an other 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 and or could reasonably be expected to be included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner will only make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. In Miscellaneous Taxation Ruling 2021 under the heading "Appendix, Question 18" 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… Law Administration Practice Statement 2005/24 provides instructions and practical guidance to tax officers on the application of Part IVA and other General Anti Avoidance rules. Paragraph 151 of Law Administration Practice Statement 2005/24 states: 151. the approach outlined in this practice statement (refer to paragraph 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. Under the Employee Share Plans, benefits provided to the Trustee by way of irretrievable cash contributions to the ESTs and to participants by way of the provision of rights or shares under the Employee Share Plans will not be subject to FBT. Consequently, no amount could reasonably be expected to be included in the aggregate fringe benefits amount, attributable to the Employee Share Plans, if the arrangement had not been entered into. Therefore, the fringe benefits tax is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of Company A or its subsidiaries in relation to a tax benefit obtained under the Employee Share Plans.

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