Private ruling: Income tax consolidated group deductions
Date of advice: 20 October 2016
Published: February 2017

Ruling: Q1: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made to Company B (Company B), as trustee of the trust (EST) established by the Trust Deed (EST Deed), to fund the subscription for, or acquisition on market of, shares in Company A by the Trustee to satisfy ESS interests issued pursuant to the Plan A and Plan B? | A1: Yes. | Q2: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs which are incurred in relation to the implementation and on-going administration of the EST? | A2: Yes. | Q3: Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to Company B as trustee of the EST to fund the subscription for, or acquisition on market of, Company A shares by Company B 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? | A3: Yes. | Q4: Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to Company B as trustee of the EST be deductible 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? | A4: Yes. | Q5: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, the whole or part of, a deduction claimed by Company A for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to fund the subscription for, or acquisition on-market of, shares in Company A by Company B as trustee of the EST? | A5: No. The rulings for questions 1 - 5 inclusive each apply for the following periods: ● Income tax year ended 30 June 20XX ● Income tax year ended 30 June 20XX ● Income tax year ended 30 June 20XX ● Income tax year ended 30 June 20XX ● Income tax year ended 30 June 20XX | Q6: Will the irretrievable cash contributions made to Company B as trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A by Company B as trustee of the EST be treated as a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A6: No. | Q7: Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from irretrievable cash contributions made to Company B as trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A? | A7: No. The rulings for questions 6 and 7 apply for the following periods: ● Fringe benefits tax year ended 31 March 20XX ● Fringe benefits tax year ended 31 March 20XX ● Fringe benefits tax year ended 31 March 20XX ● Fringe benefits tax year ended 31 March 20XX ● Fringe benefits tax year ended 31 March 20XX

Relevant facts and circumstances: Company A has implemented two employee share schemes, the Plan A and Plan B. Plan A Company A established Plan A which is governed by the Plan A Rules . Plan A aims to assist in the recruitment, reward, retention and motivation of senior management by providing the Board of Company A with the ability to offer a long term incentive to selected senior employees in the form of the grant of rights or options under the terms of the Plan A Rules. Plan A is designed to reward those selected senior employees for outstanding contributions to the business, drive financial results and support long term strategic objectives. Awards are and will be linked to the achievement of certain performance and services conditions aimed at aligning the interests of the participating employees with those of Company A shareholders. Company A provided the Plan A Rules. Plan B Company A established Plan B which is governed by the Plan B Rules . Plan B aims to assist in attracting talented staff, increase staff loyalty and reduce the staff turnover of Company A by providing the Board of Company A with the ability to offer share ownership to employees of Company A. Plan B is designed to further the growth and profitability of Company A by encouraging share ownership and thereby aligning the goals of employees with those of Company A shareholders. Company A provided the Plan B Rules. Employee Share Trust The Plan A Rules and Plan B Rules both contemplate and are designed to operate in conjunction with an employee share trust (EST). Company A as settlor and Company B as trustee executed the Employee Share Trust Deed (EST Deed). While Company B is a subsidiary member of the Company A income tax consolidated group, it will be acting solely in its capacity as trustee of the EST for the purposes of this ruling. The scheme to which this ruling relates is in effect an arm's length arrangement. Company A provided the EST Deed.


Reasons for decision: Detailed Reasoning - Detailed reasoning: The general deduction provision is section 8-1 of the ITAA 1997 which states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. | Detailed Reasoning - Losses or outgoings: For a deduction to be claimed under section 8-1 of the ITAA 1997 there must be a loss or outgoing. Company A established the EST for the sole purpose of obtaining securities for the benefit of employees as part of its strategy of recruiting, rewarding, retaining and motivating its staff. Company A has established Plan A for senior management (excluding non-Executive Directors) and Plan B for its general employees. Under Plan A each eligible employee in senior management may be offered one or more rights to acquire a share in Company A; while under Plan B each eligible employee may be offered one or more Company A shares. Company B as trustee of the EST holds the property for and on behalf of participants on the terms and conditions of the EST Deed. Company B also holds for each participant: the shares of that participant; the proceeds of sale arising from the sale by Company B of any entitlements on behalf of that participant; and all other benefits and privileges related to or arising from employee shares held by Company B on behalf of that participant on the terms of the EST Deed. Company A may notify Company B as trustee of the EST to acquire shares to enable Company A to satisfy its obligations in respect of securities that have been or are to be allocated to a participant under the terms of Plan A and Plan B. In particular, Company A may notify Company B that: ● It will issue shares to Company B or direct Company B to acquire shares which are to be held by Company B as employee shares. ● It will issue shares to Company B or direct Company B to acquire shares which are to be held by Company B as employee shares and allocated by Company B to a participant. ● That shares which are employee shares held by Company B but which are not at that time allocated to a participant are to be allocated by Company B to a participant. However, Company B as trustee of the EST is not obliged to act in accordance with a notification to acquire shares if Company A has not provided Company B with sufficient funds to comply with the direction. Company A must provide Company B as trustee of the EST with, or procure the provision to Company B of, all funds that are required by Company B to acquire shares, provide consideration to participants, deliver employee shares to participants and pay stamp duty, fees and taxes. The EST Deed shows that case contributions provided by Company A to Company B as trustee of the EST is used to acquire shares to satisfy each offer made by Company A to participants as part of Plan A and Plan B. The cash contributions provided by Company A to Company B as trustee of the EST will be irretrievable and non-refundable as: ● Company B may only dispose of employee shares in accordance with the EST Deed and any restrictions under the Plan A Rules or Plan B Rules. Company A has no right to direct Company B to dispose of employee shares (or any rights to employee shares) to Company A or any entity Company A controls. ● Although Company B may apply capital of the EST to which no participant would be entitled on termination of the EST for certain specific purposes, these purposes do not include returning any capital to Company A or any entity that Company A controls. ● Company B on termination of the EST must apply any remaining part of the property for the benefit of one or more beneficiaries at the direction of Company A or, if no direction is provided, at the discretion of Company B but must not pay any remaining property to Company A or any subsidiaries of Company A. Based on the above analysis, each cash contribution made by Company A to Company B as trustee of the EST is irretrievable and non-refundable and will be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. | Detailed Reasoning - Sufficient nexus: In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 it must be either incurred in gaining or producing assessable income so as to satisfy paragraph 8-1(1)(a) of the ITAA 1997 or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income so as to satisfy paragraph 8-1(1)(b) of the ITAA 1997. Paragraph 8-1(1)(a) of the ITAA 1997 and paragraph 8-1(1)(b) of the ITAA 1997 are alternatives, in the event one paragraph is satisfied the other need not be considered. A line of authorities have 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 and Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). In general terms a sufficient nexus will exist between a loss or outgoing and the gaining or production of assessable income where the loss or outgoing is incidental and relevant to the income earning activities. The contributions made by Company A to Company B as trustee of the EST are part of the overall employee remuneration costs of Company A. The benefits provided to employees under Plan A are designed to reward selected senior employees for outstanding contributions to the business, drive financial results and support long term strategic objectives. The benefits provided to employees under Plan B are designed to attract talented staff, increase staff loyalty and reduce the staff turnover by encouraging share ownership thereby aligning the goals of employees with those of Company A shareholders. The benefits provided to participants under Plan A and Plan B are designed to improve the overall profitability of Company A. A sufficient nexus exists between the irretrievable cash contributions made by Company A to Company B as trustee of the EST and the production of assessable income for the purposes of paragraph 8-1(1)(a) of the ITAA 1997. As paragraph 8-1(1)(a) of the ITAA 1997 is satisfied it is not necessary to consider paragraph 8-1(1)(b) of the ITAA 1997. Subsection 8-1(2) of the ITAA 1997 A loss or outgoing which may be deducted from the assessable income of a taxpayer because it satisfies subsection 8-1(1) of the ITAA 1997 may nevertheless be prevented from being deducted if any of paragraphs (a) to (d) are satisfied in subsection 8-1(2) of the ITAA 1997. | Detailed Reasoning - Capital or revenue: Paragraph 8-1(2)(a) of the ITAA 1997 operates to prevent a loss or outgoing that is capital or of a capital nature from being deductible. Company A will make irretrievable cash contributions from time to time to Company B as trustee of the EST as and when ordinary shares in Company A are to be subscribed for or acquired for participants pursuant to Plan A and Plan B. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 it was determined that the payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or of a capital nature. The irretrievable cash contributions made by Company A to Company B as trustee of the EST are not capital or of a capital nature and will not satisfy paragraph 8-1(2)(a) of the ITAA 1997. Apportionment The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant, for example, in the circumstances where contributions made by Company A to Company B as trustee of the EST for the purposes of administering the EST are used 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 a contribution is, ultimately and in substance, applied by the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares) the employer has also acquired an asset or advantage of an enduring nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of the irretrievable cash contributions it makes to Company B as trustee of the EST 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 any deduction would not need to be apportioned. Nothing in the facts suggest that the irretrievable cash contributions made by Company A to Company B as trustee of the EST are private or domestic in nature, are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. The irretrievable cash contributions Company A makes to Company B as trustee of the EST to fund the acquisition of ordinary shares in accordance with the EST Deed, Plan A Rules and Plan B Rules will be an allowable deduction to Company A under section 8-1 of the ITAA 1997. Single entity rule The single entity rule in subsection 701-1(1) of the ITAA 1997 does not affect the answer to the question of whether the irretrievable cash contributions made by Company A to Company B as trustee of the EST are deductible under section 8-1 of the ITAA 1997. Amounts contributed to Company B as trustee of the EST by Company A are held by Company B for the exclusive benefit of entities (participants) who are not members of the Company A income tax consolidated group. The EST is not a subsidiary member of the Company A income tax consolidated group and the single entity rule will not apply in the circumstances to ignore the payment that Company A makes to Company B as trustee of the EST. | Detailed Reasoning - Detailed reasoning: Company A will incur costs in relation to the establishment and implementation of the EST, including the costs that are associated with applying for this private binding ruling. Company A will also incur further costs associated with the on-going administration of the EST. The EST Deed states that Company A must provide Company B with funds required by Company B for the payment of: ● stamp duty or other transfer taxes or other fees and expenses associated with the acquisition, allocation, surrender or delivery of shares in Company A; ● taxes or costs associated with the subscription for, acquisition, allocation, surrender or delivery of shares or with the administration of the EST. The costs incurred by Company A in relation to the implementation and operation of the EST which are incurred are deductible under section 8-1 of the ITAA 1997 as either: ● costs incurred in gaining or producing the assessable income of Company A; or ● costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the analysis in Question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Nothing in the facts suggest that the costs are private or domestic in nature, are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997. Accordingly, Company A is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs which are incurred in relation to the implementation and operation of the EST. | Detailed Reasoning - Detailed reasoning: A deduction under section 8-1 of the ITAA 1997 for a loss or outgoing would generally be allowable in the income year in which the loss or outgoing is incurred. However, under certain circumstances, the timing of a deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 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 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contribution provided to a trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Subparagraph 83A-210(a)(i) of the ITAA 1997 The implementation of the Plan A Rules, Plan B Rules and establishment of the EST, as well as the provision of irretrievable cash contributions by Company A to Company B as trustee of the EST, constitute an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997. Subparagraph 83A-210(a)(ii) of the ITAA 1997 Subparagraph 83A-210(a)(ii) of the ITAA 1997 requires that money or other property is provided to another entity under an arrangement for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme. | Detailed Reasoning - ESS interest: The term ESS interest, in a company, is defined in subsection 83A-10(1) of the ITAA 1997 as being either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the Plan A Rules and Plan B Rules an offer made to an employee is an ESS interest as it is either a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share in a company (specifically, Company A). | Detailed Reasoning - Employee share scheme: The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 as: a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. Plan A and Plan B are employee share schemes for the purposes of subsection 83A-10(2) of the ITAA 1997 as they are each a scheme under which ESS interests (i.e. a beneficial interest in a share or a beneficial interest in a right to acquire a beneficial interest in a share) are provided to employees (each participant) in relation to their employment in Company A. Each scheme contains a number of interrelated components, such as: ● The granting of an offer under the Plan A Rules or Plan B Rules; ● The provision of irretrievable cash contributions to Company B as trustee of the EST; ● The allocation of Company A shares to participants in accordance with the Plan A Rules, Plan B Rules and EST Deed. Each interrelated component must be carried out so that the scheme can operate as intended. One of those components is the provision of irretrievable cash contributions by Company A to Company B as trustee of the EST. The irretrievable cash contributions enable Company B as trustee of the EST to acquire Company A shares for the purpose of enabling each participant, indirectly as part of Plan A or Plan B, to acquire ESS interests. Section 83A-210 of the ITAA 1997 will apply to determine the timing of any deduction under section 8-1 of the ITAA 1997 for an irretrievable cash contribution made to Company B as trustee of the EST where it is made before: a) a participant acquires the beneficial interest in a share in Company A under Plan A or Plan B; or b) a participant acquires the beneficial interest in a right to acquire a beneficial interest in a share in Company A under Plan A or Plan B. The deduction for the irretrievable cash contribution can only be deducted from the assessable income of Company A in the income year when the relevant beneficial interest in a share in Company A, or beneficial interest in a right to a beneficial interest in a share in Company A, is acquired by a participant under Plan A or Plan B. 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 - Detailed reasoning: As discussed in the analysis in Question 3, section 83A-210 of the ITAA 1997 will only apply if Company A makes an irretrievable cash contribution to Company B as trustee of the EST before a participant acquires the beneficial interest in a share in Company A, or before a participant acquires the beneficial interest in a right to acquire a beneficial interest in a share in Company A, under Plan A or Plan B. Accordingly, section 83A-210 of the ITAA 1997 will not apply where Company A makes irretrievable cash contributions to Company B as trustee of the EST to fund the acquisition of Company A shares to satisfy offers under Plan A or Plan B where the contribution is made after acceptance of the offer by an eligible employee. In such a situation, the irretrievable cash contributions by Company A to Company B as trustee of the EST will be deductible in the income year in which the irretrievable contributions are made under section 8-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met: 1. there must be a scheme within the meaning of section 177A of the ITAA 1936; 2. a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out; and 3. having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose). The Commissioner has considered these three requirements and will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, the whole or a part of, any deduction claimed by Company A in respect of the irretrievable cash contributions Company A will make to Company B as trustee of the EST to fund the subscription for, or acquisition on-market of, Company A shares in accordance with the Plan A Rules, Plan B Rules and EST Deed. | Detailed Reasoning - Detailed reasoning: The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986. Section 66 of the FBTAA 1986 provides that an employer must pay tax imposed in respect of the fringe benefits taxable amount of an employer of a year of tax. Under the FBTAA 1986 the fringe benefits taxable amount of an employer is calculated by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. Subsection 136(1) of the FBTAA 1986 defines 'fringe benefit' as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. Certain benefits are excluded from the definition of 'fringe benefit' by paragraphs (f) to (s) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986. Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 relevantly 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 'employee share trust' has the meaning given by subsection 130-85(4) of the ITAA 1997. Employee share trust The term 'employee share trust' is defined 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). In order for a trust to satisfy the definition of employee share trust in subsection 130-85(4), the sole activities of the trust must be those contained in paragraphs (a)-(c) in subsection 130-85(4) of the ITAA 1997. If a trust has activities which are other than those listed in paragraphs (a)-(c) of subsection 130-85(4) of the ITAA 1997 then it will not satisfy the definition of employee share trust in subsection 130-85(4) of the ITAA 1997. | Detailed Reasoning - Paragraphs 130-85(4)(a) and (b) of the ITAA 1997: The beneficial interest in a share received by a participant when an ordinary share in Company A is allocated to them under the terms of the EST Deed is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. Plan A and Plan B are each an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because each is a scheme under which ESS interests are provided to employees in relation to the employee's employment. The EST has been established to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests accepted by participants under Plan A and Plan B. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which ESS interests are provided to employees in relation to the employee's employment. Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because: ● the EST acquires shares in a company (specifically, Company A); and ● the EST ensures that ESS interests in the company (specifically, Company A) are provided under an employee share scheme to the employees in accordance with the EST Deed, Plan A and Plan B. | 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 may require that Company B as trustee of the EST undertake incidental activities that are a function of managing the EST. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997: ● the opening and operation of a bank account to facilitate the receipt and payment of money; ● the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; ● the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; ● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and ● receiving and immediately distributing shares under a demerger. Company B as trustee of the EST has, subject to the EST Deed, all of the powers in respect of the property that it would have if it were a natural person who owned the property absolutely and beneficially. Company A and Company B as trustee of the EST have agreed that the EST will be managed and administered in a way that satisfies the requirements of subsection 130-85(4) of the ITAA 1997. Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as Company B as trustee of the EST is obligated to manage and administer the EST so that any activities undertaken by EST other than those mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will be merely incidental to the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997. No fringe benefit provided The EST satisfies the definition of employee share trust in subsection 130-85(4) of the ITAA 1997 as the sole activities of the EST will be those mentioned in paragraphs (a)-(c) of subsection 130-85(4) of the ITAA 1997. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 will apply so that irretrievable cash contributions made to Company B as trustee of the EST will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. | Detailed Reasoning - Detailed reasoning: As mentioned in the answer to question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA of the ITAA 1936 or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA 1986. Notably, paragraphs 145 - 148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading “Appendix, Question 18” where, on the application of section 67 of the FBTAA, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of Practice Statement 2005/24 states: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. As discussed in the analysis in Question 6, irretrievable cash contributions made to Company B as trustee of the EST will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. As a result, the fringe benefits liability is not any less than it would have been but for the existence of the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from the irretrievable cash contributions made to Company B as trustee of the EST to fund the subscription for, or acquisition on market of, shares in Company A.

Reasons for decision: Questions 1 to 5 - application of the single entity rule in section 701-1 | The consolidation provisions of the Income Tax Assessment Act 1997 (ITAA 1997) allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of an income tax consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period that they are members of the income tax consolidated group with the head company of the group being the only entity recognised for income tax purposes. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. | As a consequence of the SER the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated, for income tax purposes, as having been undertaken by Company A as the head company of the Company A income tax consolidated group. | The SER in section 701-1 of the ITAA 1997 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). The Commissioner has therefore provided a ruling to Company A and each company which is a subsidiary member of the Company A income tax consolidated group in relation to questions 6 and 7.