Private ruling: Employee Share Scheme
Date of advice: 17 November 2017
Published: April 2018
Ruling period: For a number of income tax years commencing in the year ended 30 June 2018.
Date scheme commenced: 1 July 2017

Ruling: A8: No

Relevant facts and circumstances: Background Company A is an Australian public company listed on the Australian Stock Exchange. Company A has incorporated a Long Term Incentive Plan (LTIP) into their remuneration process. Company A considers the LTIP to be fundamental to the growth strategy of their business forming part of its senior employee attraction, retention and remuneration strategy. The LTIP aims to recognise long-term performance of senior employees by rewarding Eligible Participants with Rights to Shares in Company A, allowing them to share in the value and growth of the business. Long Term Incentive Plan (LTIP) Company A may issue invitations to Eligible Participants to apply for Performance Rights. The number of Performance Rights that an Eligible Participant may be invited to apply for will be determined by a formula set out in the LTIP Rules. A Performance Right in the LTIP is a right to be issued or transferred a number or fraction of Shares calculated in accordance with the Conversion Rate set out in the LTIP. The LTIP has a Performance Period of three years in which the various performance conditions must be satisfied before a Performance Right can be exercised: At the end of the Performance Period the Committee will determine whether the performance conditions have been satisfied and if so, whether a Performance Right has vested or lapsed. Following the Committee’s determination of whether a Performance Right has vested or lapsed, Company A will provide the relevant Eligible Participant with a Vesting or Lapse Notice. Upon receipt by Company A of a valid Exercise Notice Company A will issue or transfer the applicable number of Performance Rights Shares to the Participant or instruct and where necessary, loan funds to the trustee of the Employee Share Trust to enable the trustee to declare that the requisite number of Performance Rights Shares are being held on bare trust for the Participant. From the date of allotment, Performance Rights Shares will rank equally with all other issued shares, carry the same voting rights as other issued shares and will be entitled in full to those dividends which have a record date for determining entitlements after the date of issue. Plan Rules The LTIP Rules set out the terms and conditions of the LTIP, as well as outlining details of the operation of the LTIP. All Eligible Participants will be entitled to the benefit of the LTIP Rules and will be bound by the LTIP Rules as well as to any amendments made in accordance with the LTIP Rules. Except as otherwise expressly provided by the LTIP Rules, the Committee has the absolute and unfettered discretion to act or refrain from acting under or in connection with the exercise of any power or discretion granted to it by the LTIP rules. The Committee can issue invitations to Eligible Participants to apply for Performance Rights. The invitation will outline the terms, conditions, definitions and all other information the Committee considers appropriate. After receiving an invitation, an Eligible Participant may in accordance with the terms of the invitation, apply to subscribe for the Performance Rights referred to in the invitation in accordance with the terms of the invitation. An Eligible Participant who is a resident of Australia may renounce the invitation in respect of some or all of the Performance Rights in favour of a Nominee. An Eligible Participant resident outside of Australia must have prior written approval of the Remuneration Committee before they can renounce the Invitation in favour of any other person. Within 28 days following the end of the period for the Eligible Participant to submit an application, as specified in the invitation by the Committee, the Committee will issue the Performance Rights which are the subject of the relevant Application to the Eligible Participant following the issue of a Performance Rights Certificate by Company A and will enter into the Register the name of that Participant, the number of Performance Rights issues and issue date of such Performance Rights. If, prior to the issue of Performance Rights, an Eligible Participant or the Eligible Participant of a Nominee ceases to be an employee then any invitation and any resulting Application in respect to those Performance Rights shall, unless the Remuneration Committee decides otherwise, be deemed to never have been made. The LTIP will not form part of any contract between the Group Company (other Company A) and any Eligible Participant. A Participant has no legal or equitable interest in a share by virtue of acquiring a Performance Right. A Participant’s rights under the LTIP are purely personal and contractual. Employee Share Trust Company A have provided the following reasons for implementing the LTIP by way of the EST: ● the EST will provide various commercial benefits for Company A including administrative efficiencies and enabling employees of Company A to share in the growth and value of the company through an arms-length mechanism, and ● an external trustee acting in an independent capacity on behalf of the beneficiaries of the EST in accordance with the Trust Deed will assist Company A to satisfy corporate law requirements relating to a company dealing in its own shares. According to the Trust Deed, the EST broadly operates as follows: ● The Trust Deed allows Company A to make contributions to the EST to allow the Trustee to acquire shares for the LTIP, or request that the Trustee apply capital of the Trust for the purpose of acquiring the shares. ● The Trust Deed provides that the Trustee may, at Company A’s discretion, acquire shares in advance of allocating those shares to Participants. Shares will be issued in the name of the Trustee pursuant to the Trust Deed and may be held on an unallocated basis or as Plan Shares on behalf of an Eligible Participant at any particular time. ● The Trust Deed provides that the forfeiture of Plan Shares by a Participant will result in the Shares being held by the Trustee on an unallocated basis. The Company by notice can direct the Trustee to reallocate the Shares for the benefit of another Participant, or hold the proceeds of sale in the Fund to meet future obligations under the LTIP. ● The LTIP shares will be held by the Trustee on behalf of Eligible Participants. The Board must give notice in writing instructing the Trustee to subscribe for, acquire and/or allocate shares as specified in the Notice to be held by the Trustee as Plan Shares on behalf of an identified Eligible Participant. ● The Trustee will receive direction from Company A as to when it must allocate shares as Plan Shares to a Participant. The Trustee will notify Company A when it transfers or allocates shares to a Participant and must notify the company of the relevant details. ● The Trustee at the direction of the Participant can sell Plan Shares that the Participant is entitled to. The Trustee will apply the proceeds first to brokerage fees and the balance to the Participant. ● The Trustee must not hold more than 5 percent of the voting shares or voting interests in the capital of Company A at any point in time where holdings relate to employee incentive schemes. Should the EST be terminated, the balance of any unallocated capital or income is not able to be paid to Company A. No contributions have been made to the EST and no allocations of Shares have been made to participants as yet. It is contemplated that the period between contributions to the EST and the allocation of shares will be as follows: ● generally not significant (i.e. proposed to be less than 30 days); ● there may be instances where shares used to satisfy future obligations are acquired on-market over a period of time instead of all at once (i.e. up to six months).

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: Summary: All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. | Summary: Company A will be entitled to an income tax deduction, pursuant to section 8-1, in respect of the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of Company A’s shares by the EST. | Detailed Reasoning - Detailed reasoning: The general rules about deductions are contained in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which states: 8-1(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. 8-1(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. The EST is funded by irretrievable cash contributions from Company A, which are used to acquire shares under the Trust Deed either on market or via share issue. The irretrievable and non - refundable contributions made to the EST by Company A or its subsidiaries in relation to the LTIP will be a loss or outgoing for the purposes of subsection 8 - 1(1). Therefore, Company A will be entitled to a deduction under section 8 - 1 for a contribution paid to the Trustee that is either incurred in gaining or producing Company A ‘s assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing Company A’s assessable income (‘positive limbs’). However, subsection 8 - 1(2) prevents such a deduction to the extent that the loss or outgoing is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income or non - assessable non - exempt income, or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936 (‘negative limbs’). | Detailed Reasoning - First positive limb – incurred: To be eligible as a deduction under section 8-1, a loss or outgoing must be incurred. Although the term ‘incurred’ is not defined in the legislation, Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of ‘incurred’ – timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) – meaning of incurred – implications of the High Court decision in Coles Myer Finance (TR 94/26) provide guidance. Broadly, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. Otherwise a loss or outgoing is incurred when a taxpayer is definitively committed to the loss or outgoing (refer to FC of T v James Flood Pty Ltd (1953) 88 CLR 492). It is important to establish that the contributions are irretrievable and not refundable, as they will otherwise not be a permanent loss or outgoing incurred. A contribution made to the trustee of a Trust is incurred only when the ownership of that contribution passes from an employer to the Trustee and there is no circumstance in which the employer can retrieve that contribution – Pridecraft Pty Ltd v Federal Commissioner of Taxation [2004] FCAFC 339; Spotlight Stores Pty Ltd v Commissioner of Taxation [2004] FCAFC 339. Company A has established the EST for the purpose of facilitating the acquisition, holding and allocation of shares to meet its obligations under the LTIP, by making irretrievable and non-refundable contributions to the EST (clause 4 of the Trust Deed). The Trustee will follow instructions or notices from the Board to acquire, deliver and allocate Company A’s shares for the benefit of Participants, subject to receiving sufficient contributions. On this basis, it is concluded that Company A will incur an outgoing for the purposes of subsection 8-1(1) at the time it makes irretrievable contributions to the trustee. | Detailed Reasoning - Second positive limb – Relevant Nexus: To be deductible under section 8-1, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. To satisfy the second positive limb of section 8-1, there must be a sufficient nexus between the outgoing (contributions made by Company A) and the derivation of Company A’S assessable income - 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, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147. An expense will have the relevant connection to the business when it is ‘desirable or appropriate in the pursuit of the business ends of the business – Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56) and Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213. Draft Taxation Ruling TR 2017/D5 Income Tax: employee remuneration trusts provides guidance on when the second positive limb will be satisfied in similar circumstances in relation to an employee share trust. Whilst Draft Taxation Ruling TR 2017/D5 does not directly address employee share schemes to which Division 83A applies many of the principles would apply equally. Paragraphs 79 to 81 relevantly state: When does a contribution have a sufficient connection with business? 79. Whether a contribution is deductible under subsection 8-1(1) of the ITAA 1997 depends on whether the contribution is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. An outgoing has the relevant connection with business when it is 'desirable or appropriate in the pursuit of the business ends of the business'. 80. A contribution will be 'desirable or appropriate in the pursuit of the business ends of the business' where the employer reasonably expects the business of the employer to benefit in the form of improved employee performance, morale, efficiency or loyalty. 81. The following factors are relevant to establishing a sufficient connection between a contribution and the benefit to the employer's business: ● the nature and timing of the benefits to be derived by the employer and the employees ● employee awareness of the scheme, and ● whether the scheme and the contribution addresses (or has the capacity to address) the business-related need, function or complaint. The irretrievable contributions made by Company A to the Trustee are made for the primary purpose of acquiring shares for eligible employees under the LTIP. This is part of the eligible employee’s remuneration for their employment. The shares are to be acquired within a relatively short time period, estimated to be 30 days. Accordingly, it is considered that the irretrievable and non-refundable contributions made by Company A to the Trustee will be a cost incurred in carrying on Company A’s business and will satisfy the nexus of being necessarily incurred in carrying on that business for the purpose of gaining or producing assessable income. | Detailed Reasoning - Negative limb – income vs capital: Where a contribution satisfies the positive limbs of subsection 8-1(1), it may not be deductible to an employer under subsection 8-1(2) to the extent that such contribution is a loss or outgoing of capital, or of a capital nature, is a loss or outgoing of a private or a domestic nature, is incurred in gaining or producing exempt income or is prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. On the facts, nothing has suggested that the contributions are private or domestic in nature, or are related to producing exempt income or non-assessable non-exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in the leading case on the capital/revenue distinction, Sun Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337. In that case Dixon J stated that: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay… A contribution is not deductible under section 8-1 to the extent it secures a capital advantage for the employer, unless that advantage is small or trifling. The nature of an outgoing as either capital or revenue can generally be determined by examining the character of the advantage sought, the manner in which it is to be used, relied upon or enjoyed and the means adopted to obtain it. When considering the character of expenditure, it is critical to consider the advantage sought by it from a practical and business point of view, not just on the basis of a 'juristic classification of legal rights'. At the time of issuing the Performance Rights and/or making the contribution to the trust the employer cannot predict with certainty if the Performance Rights will be exercised and the trust fund depleted. However it is clear that it is the employer’s intention to provide a real and tangible incentive to the employees by issuing the Performance Rights and the expectation is that such Rights will be exercised at some point in the future. The remunerative benefit provided under the plan is in the form of the Performance Rights and they are issued immediately. The contribution to the trust and subsequent acquisition of the shares merely ensures that the Rights can be exercised and is an inherent part of the overall Performance Rights Scheme. Therefore any capital benefit which may accrue in making the contribution to the trust is at most incidental and trifling compared to the immediate benefit of the provision of a direct incentive in the form of a Performance Right . | Detailed Reasoning - Conclusion: Irretrievable contributions made by Company A to the Trustee are deductible under section 8-1. To the extent that any part of the contribution is of capital or of a capital nature, the Commissioner accepts that such amounts will be small or trifling and therefore disregarded for the purpose of determining deductibility. | Summary: Company A will obtain an income tax deduction, pursuant to section 8-1, in respect of costs incurred in relation to the on-going administration of the EST. | Detailed Reasoning - Detailed reasoning: Company A will incur expenses associated with the on-going administration of the EST. In accordance with the Trust Deed, the Trustee is not entitled to receive from the EST or Eligible Participants any fees or charges for administering the EST. Company A must pay to the Trustee from Company A’s own resources any fees, commission or other remuneration and may reimburse any expenses incurred by the Trustee as agreed upon from time to time. The trustee is entitled to retain for its own benefit any such fee or reimbursement. The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 as either: ● costs incurred in gaining or producing the assessable income of Company A, or ● costs necessarily incurred in carrying on Company A’s business for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 is consistent with ATO Interpretative Decision 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 above in question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses and therefore, are not excluded from being deductible under paragraph 8-1(2)(a). Accordingly Company A is entitled to an income tax deduction pursuant to section 8-1 in respect of costs incurred in relation to the implementation and on-going administration of the EST. | Summary: Irretrievable cash contributions made by Company A to The Trustee, to fund the subscription for or acquisition on-market of Company A shares by the EST, are deductible to Company A at a time determined by section 83A-210. | Detailed Reasoning - Detailed reasoning: Irretrievable contributions that are deductible under section 8-1 would generally be an allowable deduction in the income year in which the outgoing occurred. However, as the outgoing relates to an Employee Share Scheme (ESS), the timing of the deduction is determined by section 83A-210 which aligns the year in which the deduction is allowable with the time the ESS interest is acquired by the employee. Section 83A-210 of the ITAA 1997 states: (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. Section 83A-210 will only apply if there is a relevant connection between the money provided to the trustee, and the acquisition of ESS interests (directly or indirectly) by Company A under the LTIP in relation to the employee’s employment. | Detailed Reasoning - Definitions: An ESS interest, in a company, is defined in subsection 83A-10(1) as either a beneficial interest in a share in a company or the right to acquire a beneficial interest in a share in a company. An employee share scheme is defined in subsection 83A-10(2) as a scheme under which the ESS interests in a company (or its subsidiaries) are provided to employees of a company, or their associates, in relation to their employment. Section 83A-210 will only apply if there is a relevant connection between the money provided to the trustee of the EST, and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme. ATO Interpretative Decision ATOID 2010/103 Income Tax: Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust , provides: a) An option granted to an employee under the scheme will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the option to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme. b) The granting of the beneficial interests in the options, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended. c) As one of those components, the provision of money to the trustee necessarily allows the scheme to proceed. d) Consequently, the provision of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the options. A deduction for the purchase of shares to satisfy the obligation arising from the grant of options is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. e) However, the amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of options. The excess payment therefore occurs before the employees acquire the relevant options under the scheme. Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the employer in the year of income when the relevant options are subsequently granted to the employees. | Detailed Reasoning - Application to this case: The Performance Rights meet the definition of an ESS interest in subsection 83A-10(1) as a right to acquire a beneficial interest in a share in Company A. The scheme meets the definition of an employee share scheme under subsection 83A-10(2) in that it is a scheme under which ESS interests (being Performance Rights) are provided to employees of Company A (or their associates) in relation to the employee’s employment. Pursuant to section 83A-210, provided that at the time the contribution is made, the amount is not in excess of that required to purchase shares to satisfy Performance Rights which have already been issued, the deduction under section 8-1 would be allowable immediately. Where the amount is in excess of that required to purchase shares to satisfy rights which have already been issued, the deduction under section 8-1 would be deferred until such time further ESS interests are issued and the same treatment would apply at that time. In this case, where contributions are made by Company A to the Trust: ● In the same income year in which the Performance Rights are granted to the employee; or in a later income year, the deduction under section 8-1 will be available in the income year in which the contribution is made. ● In income years prior to the income year in which Performance Rights are granted, section 83A-210 will operate to delay the deduction under section 8-1 to the income year in which the Performance Rights are granted to the employee. | Summary: If the EST satisfies its obligations under the Plans, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or 20-20, nor will it trigger a CGT event under Division 104. | Detailed Reasoning - Ordinary income: Section 6-5 provides that a taxpayer’s assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of ‘income’ was observed by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said: The word “income” is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts… A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In accordance with the Trust Deed, the Trustee subscribes to Company A for an issue of shares. The Trustee pays the full subscription price for the shares and Company A receives a contribution of share capital from the Trustee. The character of the share capital that Company A receives from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A is issuing new shares to the Trustee. 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. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Therefore when Company A receives proceeds from the Trustee of the EST as subscriptions for new shares in Company A, the proceeds will be considered a capital receipt, will not be on revenue account and not ordinary income under section 6-5. | Detailed Reasoning - Section 20-20: Division 20 deals with amounts included to reverse the effect of past deductions and section 20-20 deals with assessable recoupments, which are described at subsection 20-20(2) as ‘an amount you receive by way of insurance, indemnity or other recoupment’. The amounts received by Company A will not be received by way of insurance or indemnity. In relation to ‘other recoupments’ subsection 20-20(3) 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. Recoupment of a loss or outgoing is defined in subsection 20-25(1) to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. The subscription proceeds are for the Trustee of the EST to acquire new equity in Company A which would not fall within the definition of recoupment. Therefore, as the subscription proceeds are not a recoupment, as defined in subsection 20-25(1), they will not be assessable to Company A under section 20-20. | Detailed Reasoning - (b) Capital Gains Tax (CGT): Section 102-20 states that a taxpayer can only make a capital gain or loss if, a CGT event happens. It is not possible to make a capital gain or loss if there is no CGT event. The relevant CGT events that may be applicable when the subscription proceeds are received by Company A are CGT event D1 (creating a contractual right or other legal or equitable right in another entity) and CGT event H2 (receipt for an event relating to a CGT asset). However, paragraph 104-35(5)(c) states that 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, to the Trustee and therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) 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. As no CGT event occurs, there is no amount that will be assessable as a capital gain to Company A. Therefore, when the Trustee satisfies its obligations under the Plans by subscribing for new shares, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20, nor trigger a CGT event under Division 104. Issue 1 - Question 5 | Summary: The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by Company A to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the EST. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This discretion is found in subsection 177F(1) 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. These are: ● there must be a scheme within the meaning of section 177A of the ITAA 1936; ● 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 ● 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 (dominant purpose) | Detailed Reasoning - The Scheme: Subsection 177A(1) of the ITAA 1936 (subsection 995-1(1)) provides that ‘scheme’ means: (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; It is considered that the definition is sufficiently wide to cover the proposed arrangement under the LTIP which utilises contributions made by Company A to the Trustee (in accordance with the Trust deed), to fund the acquisition of Company A shares on behalf of participating employees by the trustee. | Detailed Reasoning - Tax Benefit: 'Tax benefit' is defined in paragraph 177C(1)(b) of the ITAA 1936 as including: (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; or… In order to determine the tax benefit that would be derived by Company A, it is necessary to examine other alternative schemes Company A might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. For example: Company A could remunerate employees by way of increased salary, bonuses or deductible superannuation payments. Under these alternatives, identical or similar level of deductible expenses would arise to that which will arise under the proposed arrangement; or Company A could issue shares directly for no consideration. Having considered the tax advantages of the above alternative remuneration scheme, it suggests that there is no tax benefit for the first alternative. As payments of the additional cash amounts would be deductible to Company A, the same or similar expenses would arise, compared to the current ESS LTIP arrangement. If Company A were to issue new shares directly to its employees, it would not be entitled to any deduction for the shares (except the costs incurred when issuing and transferring any shares) unless section 83A-205 was satisfied. This provision requires that: ● Company A must have provided an ESS interest to an individual under an employee share scheme; and ● Company A did this as the individual’s employer (or as the holding company of the employer); and ● with the exception of paragraph 83A-35(2)(b), section 83A-35 must have applied to reduce the amount included in that individual’s assessable income under subsection 83A-25(1). If the shares did meet these conditions, Company A would be entitled to a deduction equal to the amount of the reduction allowable to the individual under section 83A-35 to a total amount of $1,000. By contrast, the use of the EST arrangement permits Company A, subject to the requirements of sections 8-1 and 83A-210, to claim a deduction for the full amount of the contributions it makes to the EST. It is probable that this amount would exceed that which would be allowable under section 83A-205 in the alternative scheme above. Therefore, to the extent of any increased deductions because of the EST arrangement, Company A obtains a tax benefit. While, for the reasons noted above by the applicant, it is unlikely that it would choose any other incentive plan that did not give rise to an allowable deduction (and therefore there would not be the necessary tax benefit), the analysis below proceeds on the assumption that the Commissioner would in fact be able to identify a relevant tax benefit. Section 177D of the ITAA 1936 provides that Part IVA only applies if, after having regard to certain factors specified in subsection 177D(2) of the ITAA 1936, it would be concluded that a person who entered into the scheme did so for the sole or dominant purpose of enabling the tax payer to obtain the tax benefit. | Detailed Reasoning - Subsection 177D(2) of the ITAA 1936: Subsection 177D(2) 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: For the purpose of subsection (1), have regard to the following matters: (a) the manner in which the scheme was entered into or carried out; (b) the form and substance of the scheme; (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (e) 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; (f) 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; (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). | Detailed Reasoning - (a) The manner of the scheme: In considering whether Part IVA applies, the necessary comparison to be made in relation to the factors listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant alternative. The inclusion of the Trust in the scheme does give rise to a tax benefit, but Company A has provided the following reasons for the operation of the EST: ● administering the LTIP though an EST provides for flexibility when meeting the LTIP grants, in that Company A can direct the Trustee of the EST to acquire the shares either through share issue or on-market ● the EST provides an arms-length operation through which shares in Company A can be acquired and held on behalf of the relevant employees which is important as it enables Company A to satisfy various corporate law requirements relating to a company dealing in their own shares, and ● the EST provides comfort to employees as the Trustee of the EST is external to Company A acting on behalf of the beneficiaries. Further, the scheme has been set up at the start of a financial year not at year-end. It is accepted that the Trust provides benefits to the operation of the scheme that would not be available if the shares were provided directly by Company A. | Detailed Reasoning - (b) The Form and Substance of the scheme: The substance of the scheme is the provision of shares to eligible employees who participate in the LTIP. It takes the form of payments by Company A to the Trustee of the EST who acquires shares and transfers these to the Eligible Participants. While existence of the Trust may confer a tax benefit, it cannot be concluded that it is the only benefit provided, as outlined above. There are also disadvantages and expenses uncured to Company A in operating the EST, including substantial annual costs to the third party trustee. Company A has argued that the form of the arrangement with the Trust provides the scheme with non-tax benefits and this is accepted. | Detailed Reasoning - (c) The timing of the scheme: The scheme has been entered into at the beginning of the financial year. It was not entered into at the end of a financial year in order to gain a year-end tax deduction not was there a substantial contribution to allow a large upfront deduction. The application of section 83A-210 to cash contributions made before the employee receives the right, prevents any timing advantage for the deductibility of those contributions. | Detailed Reasoning - (d) The result of the scheme: The result of the scheme is to provide Company A with allowable deductions for the contributions they make to the Trust. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of Company A to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. | Detailed Reasoning - (e) Any change in the financial position of Company A: As noted above, Company A makes irretrievable cash contributions to the Trust and those contributions constitute a real expense with the result that Company A’s financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with a trust as part of the scheme, in contrast to Company A providing shares to employees directly, there is nothing artificial, contrived or notional about Company A’s expenditure. | Detailed Reasoning - (f) Any change in the financial position of other entities or persons: The contributions by Company A to the trustee will result in a real change to the financial position of the trustee. The financial position of employee participants and their associates in the scheme will also undergo a real change. This will be the case whether the shares are acquired through the Trust or provided directly by Company A. There is nothing artificial, contrived or notional about these changes and they are reasonably expected to result. | Detailed Reasoning - (g) Any other consequence: There are no other relevant consequences for Company A, their employees or their associates that would be relevant as evidence of a dominant purpose of obtaining a tax benefit. | Detailed Reasoning - (h) The nature of any connection between Company A and any other person: The relationship between Company A and the participants in the scheme is one of employer and employee. The parties are unrelated. The contributions made by Company A are to enable employees of Company A to share in the future growth and success of the company. The contributions are commensurate with Company A’s aim of providing the participants with remuneration in a form that aligns their personal financial rewards with the risks and returns of Company A ‘s shareholders. There is nothing to suggest that the parties to the employee share scheme 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 – the purpose of the scheme: A consideration of all the factors referred to in subsection 177D(2) of the ITAA 1936 leads to the conclusion that the dominant purpose of the scheme is to provide remuneration to Company A’s employees who participate in the scheme in a form that promotes Company A’s objectives, rather than to obtain a tax benefit. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A’s in relation to irretrievable contributions made Company A to the Trust to fund the acquisition of employer shares in accordance with the scheme as outlined above. | Summary: The provision of rights or shares to Participants under the LTIP will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: A fringe benefit will only arise under subsection 136(1) of the FBTAA where benefits are provided to employees or associates of employees. Under the definition of fringe benefit, a benefit must also be provided 'in respect of’ the employment of the employee. Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA states that a fringe benefit does not include: 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 83A-B or 83A-C of that Act applies; The Commissioner accepts that the LTIP is an employee share scheme for the purposes of Division 83A and that the Performance Rights are ESS interests. As the Performance Rights are acquired for no consideration and entitle the recipient to acquire a share in Company A upon exercise, it is reasonable to assume that they are acquired at a discount. Therefore either Subdivision 83A-B or Subdivision 83A-C will apply to the acquisition of the ESS interest. Accordingly, the acquisition of Rights pursuant to the LTIP will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA | Detailed Reasoning - The provision of Company A shares on exercise of 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' in this context was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material , rather than a , causal connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee of Company A accepts an offer to participate in the LTIP, 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 (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). Therefore, the benefit that arises to an employee upon the exercise of a vested Right will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. | Summary: The irretrievable cash contributions made by Company A to the Trustee are not treated as a fringe benefit within the meaning of section 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: As discussed above, the term ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA to mean benefits provided by an employer, an associate of the employer or an arranger with the employer, to employees, in respect of the employment of the employee. Pursuant to subsection 136(1) of the FBTAA, a fringe benefit is defined to exclude: … (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 83A-B or 83A-C of that Act applies; or (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) provides that the meaning of ‘employee share trust’ is defined as having the meaning given by subsection 130-85(4). Subsection 130-85(4) states that an EST for an ESS, is a trust whose sole activities consist of the following: (a) obtaining *shares or rights in a company; and (b) ensuring that *ESS interests in the company that are beneficial interest 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) As discussed above in relation to Issue one, the terms ‘ESS interest’ and ‘employee share scheme’ are defined in section 83A-10. It has been accepted that the LTIP is an employee share scheme under which ESS interests are provided to Company A’s employees or employee’s associates. In accordance with 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 (ATOID 2010/108) a trust that obtains shares in a company to satisfy the exercise of rights acquired under an employee share scheme and on exercise allocates and holds those shares for the benefit of employees of the company, is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997, provided the condition in paragraph 130-85(4)(c) of the ITAA 1997 is also met. The Commissioner is satisfied that the condition is met as any other activities of the trust are merely incidental to its main purpose of acquiring and allocating shares on behalf of employees.). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee from being a fringe benefit. Therefore, the irretrievable contributions Company A makes to the Trustee of the EST are excluded from being fringe benefits according to paragraph 136(1)(ha) of the FBTAA. | Summary: The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of tax benefit gained from irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares. | Detailed Reasoning - Detailed reasoning: As discussed above, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145 – 148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA 1986. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA 1986 is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA 1986 is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA 1986 provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: (i) a benefit is provided to a person; (ii) an amount is not included in the aggregate fringe benefits amount of the employer; and (iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. Therefore, the Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The Explanatory Memorandum, Fringe Benefits Tax Assessment Bill 1986 explains the intention of the provisions: By sub-clause 67(2) a reference to the obtaining by an employer of a tax benefit in relation to an arrangement under which a benefit is provided to a person - the central pre-condition for the application for sub-clause 67(1) - is a reference to an amount not being included as a fringe benefit taxable amount of an employer in a year of tax where that amount could reasonably be expected to have been so included but for the arrangement… Further, paragraph 151 of Practice Statement 2005/24 provides: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA 1986. As discussed above the irretrievable cash contributions provided by Company A to the Trustee for the EST to fund the subscription for or acquisition on-market of Company A shares are excluded from the definition of a fringe benefit for the reasons provided in questions one and two of issue two above. Therefore, as these benefits have been excluded from the definition of a fringe benefit and as there is also no fringe benefits tax currently payable under the LTIP (without the use of an EST) and nor is it likely that FBT would be payable under alternative remuneration plans, the fringe benefits tax liability is not any less than it would have been but for the arrangement. Accordingly, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee to fund the subscription for, or acquisition on-market of Company A shares.

Issue 1 - Question 1: 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 to The Trustee to fund the subscription for, or acquisition on-market of Company A shares by the Employee Share Trust (‘ EST ’)? | Issue 1 - Question 2: 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 on-going administration of the EST? | Issue 1 - Question 3: Are irretrievable cash contributions made by Company A to The Trustee, to fund the subscription for, or acquisition on-market of Company A shares by the EST, deductible to Company A at a time determined by section 83A-210 of the ITAA 1997? | Issue 1 - Question 4: If the EST satisfies its obligations under the Long Term Incentive Plan (LTIP) by subscribing for new shares in Company A: | (a) Will the subscription proceeds be included in the assessable income of Company A under section 6-5 or 20-20? | (b) If the answer to the above is no, will a capital gains tax (CGT) event under Division 104 be triggered? | 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 in full, any deduction claimed by Company A to The Trustee to fund the subscription for, or acquisition on-market of Company A shares by the EST? | Issue 2 - Question 1: Will the provision of rights or shares to Participants under the LTIP be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (‘ FBTAA ’)? | Issue 2 - Question 2: Will the irretrievable cash contributions made by Company A to The Trustee, 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? | Issue 2 - Question 3: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A, by the amount of tax benefit gained from irretrievable cash contributions made by Company A to The Trustee, to fund the subscription for, or acquisition on-market of Company A shares