Private ruling: Employee share scheme
Date of advice: 2 June 2017
Published: July 2017
Ruling period: Income tax years: 1 January 20xx to 31 December 20xx | Fringe benefits tax years: 1 April 20xx to 31 March 20xx
Date scheme commenced: 1 January 20xx

Ruling: Q1: Will the Company be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 in respect of contributions made to the Trustee of the Company’s employee share trust to acquire shares in the Company to satisfy Plan A Options? | A1: Yes | Q2: Will the Company be entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 in respect of contributions made to the Trustee of the Company’s employee share trust to acquire shares in the Company to satisfy Performance Rights and Options issued under Plan B? | A2: Yes | Q3: Will the contributions made by the Company to the Trustee of the Company’s employee share trust to fund the acquisition of shares in the Company be deductible by the Company at a time determined by section 83A-210 of the Income Tax Assessment Act 1997 if the contributions are made in an income year before the income year in which the Participant acquires the relevant employee share scheme interest? | A3: Yes | Q4: Will the contributions made by the Company to the Trustee of the Company’s employee share trust to fund the acquisition of shares in the Company be deductible by the Company at a time determined by section 83A-210 of the Income Tax Assessment Act 1997 if the contributions are made in the same income year or an income year after the income year in which the Participant acquired the relevant employee share scheme interest? | A4: No | Q5: Will the contributions made by the Company to the Trustee of the Company’s employee share trust to fund the acquisition of shares in the Company be assessable income of the Company’s Employee Share Trust pursuant to sections 6-5 or 6-10 of the Income Tax Assessment Act 1997 or Division 6 of the Income Tax Assessment Act 1936 ? | A5: No | Q6: Will any capital gain or capital loss made by the Trustee of the Company’s employee share trust arising as a result of either CGT event E5 or CGT event E7 happening in respect of shares allocated to a Participant to satisfy Plan A Options or Plan B Options be disregarded under section 130-90 of the Income Tax Assessment Act 1997? | A6: Yes, provided the Participant acquires the shares, on exercise of rights acquired from Plan A Options or Plan B Options, for the same or less than the cost base of the shares in the hands of the Trustee. | Q7: Will any capital gain or capital loss made by the Trustee of the Company’s employee share trust arising as a result of either CGT event E5 or CGT event E7 happening in respect of shares allocated to a Participant to satisfy Plan B Performance Rights be disregarded under section 130-90 of the Income Tax Assessment Act 1997 ? | A7: Yes | Q8: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 applies to deny, in part or in full, any deduction claimed by the Company in respect of contributions made to the Trustee of the Company’s employee share trust for the purpose of acquiring shares in the Company to satisfy Plan A Options or Performance Rights and Options issued to a Participant pursuant to Plan B? | A8: No | Q9: Will the provision of contributions by the Company to the Trustee of the Company’s employee share trust to acquire shares in the Company be a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefits tax Assessment Act 1986 ? | A9: No

Relevant facts and circumstances: The Company is the head company of an income tax consolidated group. For the purposes of this Ruling, ‘the Company’ refers to all members of the Company’s income tax consolidated group. The Company employee share schemes The Company provides benefits to its employees through incentive schemes to acquire or receive shares in the Company (Shares). The Company’s employee share schemes assist it in creating sustainable shareholder returns by both: ● incentivising and rewarding current employees; and ● attracting new employees. The Company has two share schemes in place for Australian employees: ● Plan A; and ● Plan B. Plan B Plan B is governed by the Company’s Plan B Rules (Plan B Rules). Plan B permits the granting of the following awards: ● Performance Rights: an entitlement to receive a Share for no consideration upon the satisfaction of applicable vesting conditions. ● Plan B Options: an entitlement to acquire a Share upon satisfaction of applicable vesting conditions and payment of an exercise price (if any). ● Loan Shares: Participants are provided with a loan from the Company (or an associate of the Company) for the sole purpose of subscribing for Shares subject to satisfaction of applicable vesting conditions and subject to repayment of the loan (the lender’s recourse is limited to those Loan Shares). Only the Performance Rights and Options awarded under Plan B (Plan B Awards) are relevant to this Ruling, as only Shares relating to Plan B Awards will be held via the Company’s employee share trust (the Trust). The Company may issue a written invitation to apply for Plan B Awards to: ● a current employee of the Company or any entity related to, controlled by or otherwise deemed by the Company to be a Participant; and ● a person who is otherwise determined by the Company to be eligible to participate in Scheme, (being an Eligible Employee). The Performance Rights and Plan B Options generally have a performance period of three years. A Participant must be employed on the relevant vesting period. Participants must not sell, transfer, encumber, hedge or otherwise deal with unvested Performance Rights or Plan B Options. The Participant will be free to deal with the Shares allocated on vesting of Performance Rights, and vesting and exercise of Plan B Options, subject to the requirements of the Company’s Securities Dealing Policy. If a Plan B Award vests, the Company must issue or procure the transfer to that Participant the Shares to which they are entitled. All Plan Shares issued under a Scheme will rank pari passu in all respects with Shares of the same class for the time on issue, except for any rights or entitlements already existing by reference to a record date before the Plan Shares were issued to the Participant. Performance Rights and Plan B Options are acquired for nil consideration. Performance Rights and Plan B Options are not cash settlable on vesting or exercise. Plan B Options will have an exercise price based on a 15 day VWAP prior to the date of grant. Plan A Options Plan A Options are issued to Participants for nil consideration as part of their remuneration package. Plan A is separate to, and not subject to, the Plan B Rules. Plan A Options entitle the Participant to acquire each Share at an exercise price of $xxx. Plan A Options will vest in three equal tranches on the 12th, 24th and 36th month anniversaries of the grant. Plan A Options will vest and become exercisable on the Vesting Dates subject to the terms of the offer letter. Plan A Options are not subject to any performance or service conditions. Unexercised Plan A Options will expire seven years after the Grant Date or such other date as determined by the Company. After seven years from the date of grant, any unexercised Options will lapse. Plan A Options are not cash settlable. Contributions to the Trust in respect of the Plan A Options will only be made to the extent the Plan A Options, if exercised, are to be settled with Shares. As soon as practicable following an exercise of an Option, the Company must issue to, or procure the transfer to the Participant, the number of Shares in respect of which Options have been exercised. The Trust The Company established the Trust as an employee share trust to be used, at least initially, to facilitate and administer awards issued under the Company’s employee incentive plans, Plan B and Plan A (collectively referred to as ‘the Plans’). The Company has established the Trust for the purposes of acquiring and holding Shares in accordance with the Plans. Shares are acquired by the Trustee through contributions made by the Company to the Trustee. The cash contributions made by the Company to the Trustee of the Trust to fund the subscription for acquisition of Shares by the Trust are irretrievable and non-refundable under the Trust Deed. The Trustee will hold the initial settlement amount and all accretions to the Trust Fund (Trust Property) for the benefit of employees (including their associated nominee) and any other employee share scheme trusts that operate in accordance with Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) (collectively referred to as Beneficiaries). The Trustee for the Company’s Employee Incentive Plan Trust (the Trustee) is neither a subsidiary nor a related body corporate of the Company for the purposes of the Corporations Act 2001 . The Company is not a Beneficiary of the Trust, and is not entitled to any Shares forming the Trust Property at any time. The Trustee does not act as an agent of the Company or any Participant. The Trustee is not a trustee for the Company. The Trust will not provide loans or other forms of finance to employees. In respect of the Loan Shares, the loan is provided to Participants by the Company and not by the Trust. The Trust is intended to be an ongoing feature of the Company’s employee share schemes, and contributions will be made to the Trustee as and when required. The Trust Deed provides that it is intended that the Trust will be an employee share trust for the purposes of s.130-85(4) of the Income Tax Assessment Act 1997 . The Trustee will comply with the rules of the Plans (Plan Rules) and will give consideration to any request given to it by the Company, but will not be bound to act in accordance with any such request. The Company will indemnify the Trustee in respect of all liabilities, costs and expenses incurred by it in executing the Trust. It is expected that the Company will make contributions to the Trust no later than the time relevant Plan B Awards or Plan A Options vest and are capable of being exercised. Commercial benefits of the Trust The Company’s reasons for implementing the Plans via a Trust include that it: ● provides a vehicle for the delivery of Shares to employees; ● provides an arm’s length vehicle for acquiring and holding Shares; assists the Company with meeting its corporations law requirements in relation to dealing in its own Shares; ● provides additional capital management flexibility by allowing the Trustee of the Trust to purchase Shares from shareholders on-market or subscribe for Shares from the Company to hold for employees; ● provides an efficient structure for giving effect to Vesting Conditions and forfeiture conditions (where relevant); and ● allows Shares to be recycled without affecting the ownership interests of other shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 95 | Income Tax Assessment Act 1936 Division 6 | 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 Assessment Act 1936 Part IVA | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 10-5 | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 section 83A-20 | Income Tax Assessment Act 1997 subsection 83A-20(1) | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 subdivision 83A-B | Income Tax Assessment Act 1997 subdivision 83A-C | Income Tax Assessment Act 1997 section 104-75 | Income Tax Assessment Act 1997 subsection 104-75(1) | Income Tax Assessment Act 1997 subsection 104-75(2) | Income Tax Assessment Act 1997 section 104-85 | Income Tax Assessment Act 1997 subsection 104-85(1) | Income Tax Assessment Act 1997 section 106-50 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 130-90 | Income Tax Assessment Act 1997 subsection 130-90(1) | Income Tax Assessment Act 1997 subsection 130-90(2) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 subsection 995-1(1) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Reasons for decision: Summary: The Company is entitled to an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made to the Trustee of the Company’s Employee Share Trust (the Trust) to acquire shares in the Company for the purpose of providing an equity share plan to deliver equity based benefits in the form of Plan A Options to employees of the Company as part of their remuneration in carrying on the Company’s business for the purpose of deriving assessable income. | Detailed Reasoning - Detailed reasoning: An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust that is either: ● incurred in gaining or producing assessable income (‘first limb’) or ● necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (‘second limb’) to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936. In order to satisfy the first limb of section 8-1 of the ITAA 1997, a contribution to the trustee of an employee share trust must be incurred. As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in 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). A contribution made to the trustee of an employee share trust is incurred only when the ownership of that contribution passes from an employer to the trustee of the employee share trust and there is no circumstance in which the employer can retrieve any of the contribution (Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339; 2005 ATC 4001; (2004) 58 ATR 210; Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650; 2004 ATC 4674; (2004) 55 AT 745). The Company has established the Trust for the purpose of acquiring and holding Shares in accordance with the Plans. The Company will make contributions to the Trustee in order for the Trustee to subscribe for or acquire Shares so as to enable the Trustee to satisfy vested and exercised Plan A Options. Contributions to the Trust in respect of the Plan A Options will only be made to the extent the Plan A Options, if exercised, are to be settled with Shares. The Trust Deed does not confer on the Company any interest in Shares acquired by the Trustee under the Trust Deed. The Company is also not a Beneficiary of the Trust. Therefore, the cash contributions made by the Company to the Trustee of the Trust to fund the subscription for acquisition of Shares by the Trust are irretrievable and non-refundable under the Trust Deed. Given these facts, it is considered that the contributions made to the Trustee of the Trust by the Company will be incurred at the time the contributions are made. In order to satisfy the second limb of section 8-1 of the ITAA 1997, there must be a relevant connection between the outgoing and the business. 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. FC of T (1949) 78 CLR 47; [1949] HCA 15; 4 AITR 236; (1949) 8 ATD 431; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) 49 FLR 183; [1980] FCA 150; (1980) 11 ATR 276; 80 ATC 4542). Where an employer: ● carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business, ● makes a contribution to the trustee of an employee share trust, and ● at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business), then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business. The Company is carrying on a business and when the Company makes a contribution to the Trustee of the Trust, its primary purpose is for the contribution to be applied to the direct provision of remuneration of its employees in the form of Plan A Options. The advantage sought by the Company relates to the efficient ongoing performance of business. The contribution to the Trust is an employee remuneration cost incurred in carrying on the business for the purpose of deriving assessable income. The Plan A Options will vest in three equal tranches on the 12th, 24th and 36th month anniversaries of the grant. Given this, it is considered that the contribution made under Plan A Options will be applied to the direct provision of remuneration of employees. Consequently, the irretrievable contributions to the Trustee of the Trust by the Company for the purpose of remunerating its employees under the Plan A Options is an outgoing incurred in carrying on the Company’s business for the purpose of gaining or producing assessable income. | Detailed Reasoning - Not a loss or outgoing of capital or of a capital nature: Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature. On weighing up the facts in this case it is considered that: ● the contributions made by the Company to the Trustee of the Trust are for the purposes of procuring Shares to satisfy the Company’s commitments arising under the Plan A Options. They are primarily outgoings incurred in the ordinary course of carrying on its business ● the contribution is quickly dissipated in providing Shares (or an interest in Shares) to Participants after the Plan A Options vest and become exercisable on the Vesting Dates (which generally occurs between one to three years) subject to the terms of the Plan A Options Offer Letter; and ● eligible Participants will receive an entitlement to Shares (direct interest in the employer) post the vesting and exercise period. Therefore, the irretrievable contributions made by the Company to the Trustee of the Trust for the purpose of remunerating employees under the Plan A Options are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Accordingly, the irretrievable contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition of, Shares by the Company are incurred in gaining or producing assessable income and deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Summary The Company is entitled to a tax deduction under section 8-1 of the ITAA 1997 for irretrievable cash contributions made to the Trustee of the Trust to acquire Shares in the Company for the purpose of providing an equity share plan to deliver equity based benefits in the form Performance Rights and Plan B Options (Plan B Awards) to employees of the Company as part of their remuneration in carrying on the Company’s business for the purpose of deriving assessable income. Detailed reasoning As outlined in Question 1, an employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an employee share trust that is either: ● incurred in gaining or producing assessable income (‘first limb’) or ● necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (‘second limb’) to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936. To satisfy the first limb of section 8-1 of the ITAA 1997 a contribution to the trustee of an employee share trust must be incurred. The Company has established the Trust for the purposes of acquiring and holding Shares in accordance with the Plan Rules. The Company will make contributions to the Trustee of the Trust in order for the Trustee to subscribe for Shares or acquire Shares so as to enable the Trustee to satisfy vested and exercised Plan B Awards. The Trust Deed does not confer on the Company any interest in Shares acquired by the Trustee under the Trust Deed. There is also no section in the Trust Deed or the Plan B Rules that will allow the Company to retrieve any of the contributions it makes to the Trust. The Company is also not a Beneficiary of the Trust. Given these facts, it is considered that the contributions made to the Trustee of the Trust by the Company will be incurred at the time the contributions are made. In order to be deductible under section 8-1 of the ITAA 1997, 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, however the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature. On weighing up the facts in this case, it is considered that: ● the contributions made by the Company to the Trustee of the Trust are for the purpose of procuring Shares to satisfy the Company’s commitments arising under the Plan B Awards. They are primarily outgoings incurred in the ordinary course of carrying on its business; ● the contributions are quickly dissipated in providing Shares (or an interest in Shares) to Participants after the vesting period and vesting conditions are met or the Participant has exercised the Plan B Options (this generally occurs between one to three years); ● eligible Participants will receive an entitlement to Shares (direct interest in the employer) post the vesting and exercise period; and ● the Plan B Awards provide eligible Participants with an opportunity to participate in the future growth and profit of the employer as vesting conditions are linked to performance and retention of eligible employees. Therefore, the irretrievable contributions made by the Company to the Trustee of the Trust for the purpose of remunerating employees with Plan B Awards are not considered capital in nature, or any capital component is sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Accordingly, the irretrievable contributions made by the Company to the Trustee of the Trust to fund the subscription for, or acquisition of, Shares in order to satisfy Plan B Awards are incurred in gaining or producing assessable income and deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 3: Summary The irretrievable cash contribution made by the Company to the Trustee of the Trust to fund the subscription for Shares or acquisition of Shares on-market by the Trust will be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made in an income year before the Plan B Awards or Plan A Options are acquired by participating employees. Detailed reasoning The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 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 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. The term ‘employee share scheme’ is defined in subsection 83A-10(2) of the ITAA 1997 to be: … a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) *subsidiaries of the company; in relation to the employees’ employment. For the purposes of subsection 83A-10(2), subsection 995-1 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. Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the irretrievable cash contributions provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an individual under the Plan B Awards or Plan A Options, in relation to the their employment. Pursuant to subsection 83A-10(1), an ‘ESS interest’ in a company is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company. The Plan B Awards and Plan A Options under the Plans are ESS interests for the purposes of subsection 83A-10(1) as the Plan B Awards and Plan A Options provide the Participant with a right to acquire a beneficial interest in a share in the company. The granting of the rights to Participants, the provision of the money to the Trust under the Plans, the acquisition and holding of the shares by the Trustee, and the holding and the allocation of shares to the Participants 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. The provision of money to the Trustee necessarily allows the schemes to proceed. The provision of cash contributions to the Trustee is considered to be for the purpose of enabling the Participants to acquire Shares upon the conversion of Plan B Awards and Plan A Options in accordance with the Plans and Trust Deed. As noted above, the Plan B Awards or Plan A Options are ESS interests (rights) which the Participants will acquire upon being granted them by the Company. The acquisition time for the purposes of section 83A-210 of the ITAA 1997 occurs when the rights to the Shares are granted to the Participants. Accordingly, under section 83A-210 of the ITAA 1997, the cash contributions that the Company makes to the Trustee will be deductible in the income year in which the acquisition time arises for the rights. If the cash contributions are provided before the rights to the Shares are acquired by participating employees, then section 83A-210 of the ITAA 1997 will apply. However, section 83A-210 of the ITAA 1997 will not apply to a deduction for the purchase of shares to satisfy an obligation arising from rights to shares already granted. Therefore, when the Company makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for a right occurs, it will be allowed a deduction under section 83A-210 of the ITAA 1997 in the income year in which the ESS interest (right) is granted (acquired). It should be noted that if any amount of money is used by the Trustee to purchase excess Shares intended to meet a future obligation arising from a future grant of rights, the excess payment will occur before the employees acquire the relevant rights (ESS interests) under the schemes. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to the Company in the year of income when the relevant rights are subsequently granted to Participants. | Detailed Reasoning - Question 4: Summary The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for Shares or acquisition of Shares on-market by the Trust will not be deductible to the Company at a time determined by section 83A-210 of the ITAA 1997 if the contributions are made in the same income year, or in an income year that is later than the income year, in which the Plan B Awards or Plan A Options are acquired by participating employees. The cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the contribution is made. Detailed Reasoning Section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an individual under an employee share scheme in relation to the individual’s employment and the contributions are made before the acquisition of the ESS interests. Section 83A-210 of the ITAA 1997 will not apply if the Company makes a cash contribution in the same income year or in an income year that is later than the income year in which the corresponding Plan B Award or Plan A Option is granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is incurred. | Detailed Reasoning - Question 5: Summary The irretrievable cash contributions provided by the Company to the Trustee of the Trust to fund the acquisition of Shares in the Company will not be assessable income under section 6-5 or section 6-10. The cash contributions provided by the Company constitute capital receipts of the Trust. Therefore, the cash contributions will not be included in the net income of the Trust for the purposes of Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936). Detailed reasoning Section 95 of the ITAA 1936 defines net income in relation to a trust, insofar as it is relevant: net income , in relation to a trust estate, means the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions … Subsection 6-5(1) of the ITAA 1997 states: Your assessable income includes income according to ordinary concepts, which is called ordinary income . Subsection 6-10(1) states: Your assessable income also includes some amounts that are not ordinary income. Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5. None of the provisions in section 10-5 of the ITAA 1997 are relevant in the present circumstances. Therefore, the cash contributions received from the Company will not be assessable income under section 6-10 of the ITAA 1997. Accordingly, the cash contributions will only be included in the calculation of the net income of the Trust under section 95 of the ITAA 1936 if the amounts are assessable as income according to ordinary concepts under section 6-5 of the ITAA 1997. Income according to ordinary concepts is not defined in the ITAA 1997. However, there is a substantial body of case law which discusses factors which indicate whether an amount has the character of income according to ordinary concepts. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not derived in carrying on a business. In Commissioner of Taxation v. Montgomery [1999] HCA 34, the Court had to consider whether an amount received by the taxpayer should be characterised as capital or income. Justices Gaudron, Gummow, Kirby and Hayne quoted a passage from the judgment of Justice Pitney in the United States Supreme Court in Eisner v Macomber 252 US 189 (1919) at 206-7, which included the following statement: The fundamental relation of “capital” to “income” has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time... Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being “derived” that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; … that is income derived from property. Nothing else answers the description. In GP International Pipecoaters Pty Ltd v. Federal Commissioner of Taxation (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. The court further stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient’s purpose in engaging in the transaction, venture or business. In this case, the Trust was established to administer some of the current and future employee incentive plans adopted by the Company, and is intended to act as an employee share trust. The Company must provide the Trust with cash contributions to enable the Trustee to acquire the Shares. The character of the proceeds received by the Company from the Trustee can be determined by ‘the character of the right or thing disposed of in exchange for the receipt’. Here, the Company is issuing the Trustee with new Shares as a result of the Trustee subscribing for new Shares. The character of the newly issued share is one of capital. The subscription is consideration for the issue of shares by the Company to the Trustee of the employee share trust and should be accounted for as a contribution to the share capital of the Company in its books and records. The subscription proceeds accordingly are off a capital nature and will constitute capital receipts of the Trust. Accordingly, when the Company receives the subscription proceeds from the Trustee of the employee share trust where the Trust subscribes for new shares in the Company to satisfy its obligations under the Plans, the subscription proceeds received by the Company are of a capital receipt. That is, the contributions will not be on revenue account and will not be assessable income under section 6-5 of the ITAA 1997 and therefore will not be included in the net income of the trust under section 95 of the ITAA 1936. | Detailed Reasoning - Question 6: Summary Provided that the Participant does not acquire the beneficial interest in the Share for more than its cost base in the hands of the Trustee at the time that CGT event E5 or E7 happens, section 130-90 of the ITAA 1997 operates to disregard any capital gain or loss made by the Trustee on any Share allocated to satisfy Plan A Options or Plan B Options when a Participant becomes absolutely entitled to that share. Detailed reasoning Section 130-90 operates to disregard any capital gain or capital loss if the conditions in that section are satisfied. Subsections 130-90(1) and 130-90(2) state: Shares held for future acquisition under employee share schemes 130-90(1) Disregard any *capital gain or *capital loss made by an *employee share trust, or a beneficiary of the trust, to the extent that it results from a *CGT event, if: (a) the CGT event is CGT event E5 or E7; and (b) the CGT event happens in relation to a *share; and (c) the beneficiary had acquired a beneficial interest in the share by exercising a right; and (d) the beneficiary’s beneficial interest in the right was an *ESS interest to which Subdivision 83A-B or 83A-C (about employee share schemes) applied. 130-90(2) Subsection (1A) or (1) does not apply if the beneficiary acquired the beneficial interest in the share for more than its cost base in the hands of the employee share trust at the time CGT event happens. In order for subsection 130-90(1) to apply and disregard a particular capital gain or capital loss of a trust (or a beneficiary of that trust), the following requirements must be satisfied; ● the Trust is an employee share trust; ● CGT event E5 or CGT event E7 happens in relation to a share, and ● The Participant (a beneficiary of the Trust) acquired a beneficial interest in the share by exercising a right, which was an ESS interest to which Subdivision 83A-B or 83A-C applied. Each of these requirements is considered in turn below. | Detailed Reasoning - Employee share trust: For section 130-90 to apply, the Trust must be an employee share trust for the purposes of the ITAA 1997. An ‘employee share trust’ for an employee share scheme is defined in subsection 130-85(4) to mean 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). ESS interest An ‘ESS interest’ in a company, is defined in subsection 83A-10(1), to mean a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company. Under the Plan A Options plan and Plan B Options plan, the right to acquire a Share and the beneficial interest in the Share that is acquired are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. Employee share scheme An ‘employee share scheme’ is defined in subsection 83A-10(2) as follows: (2) An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees’ employment. For the purposes of subsection 83A-10(2), subsection 995-1(1) defines the term ‘scheme’ as follows: scheme means: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan A Options plan and Plan B Options plan are employee share schemes for the purposes of Division 83A as they are arrangements which provide an ESS interest (i.e. a beneficial interest in a share or a right) to a Participant in relation to their employment in the Company. Is the Trust an employee share trust? The Company established the Trust under the Trust Deed for the purpose of acquiring and allocating Shares to Participants in satisfaction of Plan A Options and Plan B Options (i.e. ESS interests) acquired by the Participant under the Plan A Options plan and Plan B Options plan. Therefore, paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 are satisfied because: ● the Trust acquires shares in the Company, and ● the Trust ensure that ESS interests as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an ESS, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the governing documents of the scheme. In order to meet the definition of employee share trust, a trust’s sole activities must be the activities covered by paragraphs 130-85(4)(a) and (b) and any other activities that are merely incidental. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) requires the Trustee to undertake incidental activities that are a function of managing the Plans and administering the Trust. For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include: ● 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 employer ● dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme ● the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares ● the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries, and ● receiving and immediately distributing shares under a demerger. Activities that the Commissioner considers will not satisfy the sole activities test include: ● any activities that are not a necessary function of managing an employee share scheme or administering the trust, and ● any activities which result in employees being provided with additional benefits such as the provision of financial assistance including a loan to acquire shares. In this case, the Trust satisfies the definition of an employee share trust in subsection 130-85(4) as: ● the Trust acquires shares in a company; ● the Trust ensures that ESS interests are provided under an employee share scheme by allocating those shares to the employees in accordance with the Trust Deed and Plans; and ● the Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the Trust. Consequently, all activities carried out by the Trustee are consistent with and support the Trustee solely in relation to its dealing with Shares to be acquired, allocated, held and delivered to participants under the Plan A Options plan and Plan B Options plan. This is supported by the Trust Deed which provides that it is intended that the Trust will be an employee share trust for the purposes of subsection 130-85(4) of the ITAA 1997. Accordingly, all other activities carried out by the Trustee are merely incidental to acquiring shares in a company and providing those shares to employees of the company. Therefore, the requirement in paragraph 130-85(4)(c) is satisfied and the Trust is an employee share trust for the purposes of section 130-90. | Detailed Reasoning - CGT event happens in relation to the Share: Paragraph 130-90 will only operate to disregard a capital gain or capital loss made by the employee share trust to the extent that it results from either CGT event E5 or CGT event E7 happening in relation to a share. CGT event E5 will happen in the circumstances set out in subsection 104-75(1) of the ITAA 1997, which states: CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust (except a unit trust or a trust to which Division 128 applies) as against the trustee (disregarding any legal disability the beneficiary is under). CGT event E7 will happen in the circumstances set out in subsection 104-85(1), which states: CGT event E7 happens if the trustee of a trust (except a unit trust or a trust to which Division 128 applies) disposes of a CGT asset of the trust to a beneficiary in satisfaction of the beneficiary’s interest, or part of it, in the trust capital. Accordingly, paragraphs 130-90(1)(a) and 130-90(1)(b) are satisfied. | Detailed Reasoning - ESS interest to which Subdivision 83A-B or 83A-C applies: Paragraph 130-90(1)(c) is satisfied as a Participant will have acquired a beneficial interest in the Company’s Share by exercising the rights granted under the Plan A Options plan and Plan B Options plan. To satisfy paragraph 130-90(1)(d), a beneficiary’s beneficial interest in the right must be an ESS interest to which Subdivision 83A-B or 83A-C applies. Subsection 83A-20(1) of Subdivision 83A-B states: | Detailed Reasoning - 83A‑20 Application of Subdivision: (1) This Subdivision applies to an *ESS interest if you acquire the interest under an *employee share scheme at a discount. Note 1: This Subdivision does not apply if Subdivision 83A‑C applies: see section 83A‑105 Note 2: If an associate of yours acquires an interest in relation to your employment, this Division applies as if you, rather than your associate, acquired the interest: see section 83A-305 Similarly, Subdivision 83A-C applies if the requirements in section 83A-105 are met. One of the requirements in section 83A-105 is that section 83A-20 applies to the ESS interest. As established above, the Plan A Options plan and Plan B Options plan are employee share schemes for the purposes of Division 83A as they are an arrangement/plan (scheme) under which an ESS interest, that is, a beneficial interest in Plan A Options or Plan B Options to acquire an interest in a share of the Company, is provided to employees in relation to their employment by the Company. The Plan A Options and Plan B Options are acquired under the Plans at no cost. Accordingly, prima facie, Subdivision 83A-B will apply to rights acquired under the Plan A Options and Plan B Options plans because, pursuant to subsection 83A-20(1), the relevant ESS interests will be acquired under an employee share scheme at a discount. It should be noted however that whether a Participant is ultimately taxed upfront on some or all of any discount received (under Subdivision 83A-B of the ITAA 1997) or is able to defer the timing of the inclusion of an amount in their assessable income (under Subdivision 83A-C of the ITAA 1997), will depend on which of the additional requirements in those subdivisions have been satisfied. Under either circumstance paragraph 130-90(1)(d) will be satisfied. Accordingly, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied. | Detailed Reasoning - Subsection 130-90(2) of the ITAA 1997: The exception in subsection 130-90(2) of the ITAA 1997 may apply in this case as monetary consideration is paid by the Participant to acquire each Share. Provided the Participant acquires each Share, on exercise of a right acquired from a Plan A Option or Plan B Option, for the same or less than the cost base of the Share in the hands of the Trustee at the time that CGT event E5 or E7 happens, section 130-90 of the ITAA 1997 will operate to disregard any capital gain or loss made by the Trustee on the share when the Participant becomes entitled to that share. | Detailed Reasoning - Question 7: Summary Any capital gain or capital loss made by the Trust from CGT event E5 or CGT event E7 happening on the transfer of the legal title in Allocated Trust Shares to the Participant to satisfy Plan B Performance Rights will be disregarded under section 130-90 of the ITAA 1997. Detailed reasoning In order for subsection 130-90(1) to operate to disregard a particular capital gain or capital loss of a trust (or a beneficiary of that trust), the following requirements must be satisfied: ● the Trust is an employee share trust; ● CGT event E5 or CGT event E7 happens in relation to a share, and ● the Participant (a beneficiary of the Trust) acquired a beneficial interest in the share by exercising a right, which was an ESS interest to which Subdivision 83A-B or 83A-C applied. Each of these requirements is considered in turn below. | Detailed Reasoning - Employee share trust: For the reasons outlined in Question 6 above, paragraphs 130-90(1)(a) and 130-90(1)(b) are satisfied. | Detailed Reasoning - ESS interest to which Subdivision 83A-B or 83A-C applies: For the reasons outlined in Question 6 above,, all the conditions in subsection 130-90(1) of the ITAA 1997 have been satisfied. | Detailed Reasoning - Subsection 130-90(2) of the ITAA 1997: The exception in subsection 130-90(2) of the ITAA 1997 does not apply in this case as no monetary consideration is paid by the Participant to acquire the ESS interest (the Plan B Performance Right) or Share. Therefore, the Trustee of the Trust will disregard any capital gain or capital loss arising from CGT event E5 or CGT event E7 happening when Shares are transferred to the Participant under a Plan B Performance Right. | Detailed Reasoning - Question 8: 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 the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for the Company’s Shares or acquisition of the Company’s Shares on-market by the Trust to satisfy Plan A Options or Plan B Performance Rights and Options issued to a Participant. Detailed reasoning Part IVA of the ITAA 1936 is a general anti-avoidance provision. 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. Part IVA of the ITAA 1936 sets out the following requirements which must be met before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936: ● a ‘tax benefit’, as identified in section 177C, was or would but for subsection 177F(1), has been obtained; ● the tax benefit was or would have been obtained in connection with a ‘scheme’ as defined in section 177A of the ITAA 1936; ● having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA applies. Law Administration Practice Statement PS LA 2005/24 Application of General Anti-avoidance Rules deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. | Detailed Reasoning - The Scheme: A scheme is defined in subsection 177A(1) of the ITAA 1936 to mean: (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 this definition is sufficiently wide to cover the arrangements under the Plans, which consist of the establishment of the Trust, including the Trust Deed, the use of the Trust to manage the Plans, the payment of irretrievable contributions by the Company to the Trust, acquisition of Shares by the Trustee and allocation of those Shares to Participants. | Detailed Reasoning - Tax Benefit: 'Tax benefit' is defined in subsection 177C(1) of the ITAA 1936. As far as is relevant here, a tax benefit is: (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; In order to determine the tax benefit that would be derived by the Company from this scheme, it is necessary to examine alternative hypotheses or counterfactuals. That is, what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out and what other schemes the Company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. By using a trust, a potential tax benefit is created through the deduction received under section 8-1 of the ITAA 1997 for the irretrievable cash contributions made to the Trustee. | Detailed Reasoning - Paragraph 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; (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 the ITAA 1936 or ITAA 1997 that, but for Part IVA, would be achieved by the scheme (e) any change in 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 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 177D(2)(f) of the ITAA 1936, 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 177D(2)(f). Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the factors listed in subsection 177D(2) is between the scheme as proposed and the relevant counterfactual. There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, having regard to the factors set out in subsection 177D(2) of the ITAA 1936, 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 the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the Trust to satisfy Plan B Performance Rights and Options or Plan A Options issued to a Participant pursuant to the Company’s Employee Incentive Plan. | Detailed Reasoning - Question 9: Summary The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for the Company’s Shares or acquisition of the Company’s Shares on-market are not fringe benefits within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). Detailed reasoning A liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA 1986 which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer in a year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a fringe benefit is provided. As far as is relevant in this case, the term ‘fringe benefit’ is defined in subsection 136(1) of the FBTAA 1986 to mean benefits provided by an employer, to employees, in respect of the employment of the employee. Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 states that a fringe benefit does not include: 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); An employee share trust is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997. As concluded in question 4, the Trust is an employee share trust in accordance with subsection 130-85(4). Consequently, paragraph (ha) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the Trust from being a fringe benefit. Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the Trust, to fund the subscription for or acquisition on-market of the Company’s shares, will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986.