Private ruling: Employee Share Schemes
Date of advice: 29 June 2016
Published: August 2016

Ruling: Q1: Will Company A Limited (Company A), as head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A tax consolidated group to Company B (Trustee), as trustee of the trust (Trust) established by the Company A Employee Share Trust Deed (Trust Deed), to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee to satisfy ESS interests issued pursuant to the Incentive Right Plan (IRP)? | A1: Yes. | Q2: Will Company A as head entity of the Company A income tax consolidated group be entitled to deduct an amount under section 8-1 of the ITAA 1997, in respect of costs incurred by Company A or any subsidiary member of the Company A income tax consolidated group, in relation to the implementation and on-going administration of the Trust? | A2: Yes. | Q3: Will irretrievable cash contributions made by Company A, or any subsidiary member of the Company A income tax consolidated group to the Trustee, to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee, be deductible to Company A at a time determined by section 83A- 210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: If the Trustee satisfies its obligations under the Trust Deed and IRP by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997, or trigger a CGT event under Division 104 of the ITAA 1997? | A4: No. | Q5: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, any deduction claimed by Company A as head entity of the income tax consolidated group in respect of the irretrievable cash contributions made by Company A, or any subsidiary member of the income tax consolidated group, to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee? | A5: No. The rulings for questions 1 to 5 inclusive each apply for the following periods: Income tax year ended 31 December 2016 Income tax year ended 31 December 2017 Income tax year ended 31 December 2018 Income tax year ended 31 December 2019 Income tax year ended 31 December 2020 | Q6: Will the provision of Incentive Rights by Company A to employees of Company A, or any subsidiary of Company A, under the IRP be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A6: No. | Q7: Will the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares constitute a fringe benefit in relation to Company A, or any subsidiary of Company A, within the meaning of section 136(1) of the FBTAA 1986? | A7: No. | Q8: Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits taxable amount of Company A, or any subsidiary 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? | A8: No. The rulings for questions 6 to 8 inclusive each apply for the following periods: Fringe benefits tax year ended 31 March 2017 Fringe benefits tax year ended 31 March 2018 Fringe benefits tax year ended 31 March 2019 Fringe benefits tax year ended 31 March 2020 Fringe benefits tax year ended 31 March 2021

Relevant facts and circumstances: Background Company A is an Australian listed company which provides services to the mining, and related sectors. Company A specialises in sustaining capital works and the provision of shutdown, construction and maintenance services. As part of its overall remuneration strategy, in addition to fixed remuneration, Company A offers certain employees and Directors' payments of shares upon satisfaction of certain performance conditions through the Incentive Right Plan. Incentive Right Plan The Incentive Right Plan (IRP) is governed by rules contained in the Company A Incentive Right Plan which was issued by the board of Company A (IRP Rules). Rule 20 of the IRP Rules defines the following relevant terms: Acceptance Form means a form to accept Incentive Rights Offered under the Plan substantially in the form annexed to these Rules as Annexure A with any amendment or modification determined from time to time by the Board; Board means all or some of the Directors acting as a board of the Company; Cashless Exercise Facility has the meaning given in Rule 5.7(a) Company means Company A; Cash Settled has the meaning given to that term in Rule 6.1(c)(ii)(G)(II) Certificate means a certificate in respect of Incentive Rights issued under the Plan in such form as the Board may approve from time to time Change of Control Event means any of the following: (a) if a person acquires voting power (within the meaning of section 610 of the Corporations Act) in more than 50% of the Shares in the Company as a result of a takeover bid; (b) if a person acquires voting power (within the meaning of section 610 of the Corporations Act) in more than 50% of the Shares in the Company through a scheme of arrangement; or (c) any event (including a merger of the Company with another company) whether specified above or not and whether at a different percentage to that specified above or not, which the Board determines, in its absolute discretion, to be a Change of Control Event; Eligible Employee means a person who: (a) has an Offer to take up Incentive Rights under the Plan within that employee's Contract; or (b) is at the time of the Offer, and has been for a period of at least 12 months, a full or part-time employee or an executive or non-executive Director of the Group Equity Settled has the meaning given to that term in Rule 6.1(c)(ii)(G)(II) Exercise Price means the price determined by or the mechanism by which the price will be determined by the Board under Rule 5.2 Expiry Date means, subject to the Rules, the expiry date of Incentive Rights, being the earlier of: (a) the date as set out in an Offer to an Eligible Employee (if any); or (b) 15 years from the date of the Offer to an Eligible Employee; Group means the Company and each of its Subsidiaries from time to time Incentive Right means an Option or Performance Right; Incentive Right Holder means the holder of an Incentive Right issued under the Plan Listed means the Shares of the Company are officially quoted by the ASX; Listing Rules means the official listing rules of the ASX Market Price means, in relation to a particular date, the weighted average market price per Share (weighted by reference to volume) during five consecutive trading days on the ASX ending on the day before the particular date Offer means an offer in writing made by the Board to an Eligible Employee to take up Incentive Rights under the Plan made in accordance with Rule 6; Option means, subject to adjustment in accordance with Rule 11, an option to subscribe for one Share in accordance with the Rules; Performance Right means a right granted to an Eligible Employee, subject to the terms and conditions of these Rules, to: (a) receive a Share by transfer, allocation or allotment; or (b) be paid a cash amount determined under these Rules, with the method of settlement to be determined by the Board in its absolute discretion; Vesting Conditions means one or more conditions (if any) as determined by the Board to apply to an Incentive Right as set out under the Offer which are conditions of the Incentive Right becoming Vested and Vested means that all such conditions have been satisfied. Rule 5.1 of the IRP Rules states that Incentive Rights: • Incentive Rights are issued for nil consideration. • Incentive Rights lapse on their Expiry Date. • Incentive Rights may not be sold transferred, mortgaged, charged or otherwise dealt with or encumbered. • Incentive Right Holders have no rights or entitlements to participate in dividends declared by Company A or rights to vote at meetings of Company A in respect of an Incentive Right that they hold. Rule 5.3 of the IRP Rules states that the issue of an Incentive Right does not confer any right or interest in any Share until the Vesting Conditions in respect of the Incentive Right have been satisfied or waived by the Board at its discretion or the Incentive Right has otherwise become exercisable in accordance with the IRP Rules. Rules 5.4 of the IRP Rules states that: • If an Offer provides for the deemed automatic exercise of an Incentive Right then no further action is required by the Eligible Employee upon the vesting of that Incentive Right in order to exercise the Incentive Right. • If an Offer provides for the manual exercise of an Incentive Right then once it has Vested an Incentive Right Holder may exercise it by lodging: • A written notice to Company A which specifies the number of shares in respect of which the Incentive Rights are being exercised; • A cheque for the Exercise Price or confirmation that the Eligible Employee will use the Cashless Exercise Facility; and • The Certificate for the Incentive Rights being exercised. • If an Offer provides that the Board will determine the method of settlement following exercise or does not otherwise specify the method of settlement then the Board, as soon as reasonably practicable, must determine whether the relevant Incentive Right will be Cash Settled, Equity Settled or a combination of Cash Settled and Equity Settled. Rule 5.5 of the IRP Rules states that where the Board has determined that an Incentive Right will be Equity Settled then, on exercise of the Incentive Right, Company A must issue or procure the transfer to the Incentive Right Holder, or instruct the Trustee to either subscribe for, acquire and/or allocate for the benefit of the Incentive Right Holder, the numbers of shares in respect of the exercised Incentive Right. Rule 5.6 of the IRP Rules states that where the Board has determined that an Incentive Right will be Cash Settled then, on exercise of the Incentive Right, Company A must make a cash payment to the Incentive Right Holder equal to the sum of the Market Price of an ordinary share in Company A at the date of exercise multiplied by the number of validly exercised Incentive Rights that will be Cash Settled (less any taxes and superannuation required to be withheld under applicable law). Rule 5.7 of the IRP Rules states that an Offer to an Eligible Employee may specify that the Incentive Rights that are subject of that Offer have a Cashless Exercise Facility. The Cashless Exercise Facility allows the Eligible Employee to, on exercise of the relevant Incentive Rights, elect to pay the Exercise Price per Incentive Right by setting off the total Exercise Price against the number of shares they are entitled to receive upon exercise of the Incentive Rights (calculated by reference to a formula). Rule 5.10 of the IRP Rules states that the Board may in its absolute discretion make offers of Incentive Rights to Eligible Employees. Rule 5.12 of the IRP Rules states that Incentive Rights must be issued in compliance with the terms of the IRP Rules, Corporations Act 2001 , Listing Rules, ITAA 1997 and any additional terms as considered appropriate by the Board. Rule 6.1 of the IRP Rules states that: • The Board may make Offers in writing to Eligible Employees inviting them to take up Options under the Plan. • Each Offer made by the Board must specify the number of Incentive Rights for which the Eligible Employee may apply and the terms and conditions, including: Exercise Price (if any), Expiry Date, Vesting Conditions, Acceptance Period and manner of Settlement of the Incentive Rights. Each offer must also specify whether a manual exercise of the Incentive Rights is permitted in accordance with rule 5.4 of the IRP Rules. Rule 6.2 of the IRP Rules states that to accept an Offer made by the Board the Eligible Employee must send a completed Acceptance Form to Company A. Rule 6.4 of the IRP Rules states that upon receipt of a completed and signed Acceptance Form which is accepted by the Board, Company A will issue to the Eligible Employee: • The number of Incentive Rights applied for by the Eligible Employee to the Eligible Employee on terms of issue specified in the Offer. • A Certificate for the Incentive Rights Rule 7 of the IRP Rules states that the Board shall not Offer or issue Incentive Rights to any Eligible Employee in accordance with the IRP Rules if it would cause Company A to exceed any thresholds set out in ASIC Class Order 14/1000 (or any class order or law which supersedes it) or the Listing Rules if Company A is Listed. Rule 8.1 of the IRP Rules states that an Incentive Right will lapse and be forfeited if: • The Eligible Employee voluntarily resigns from employment with Company A other than to take up employment with another member of the Group; • The Eligible Employee is dismissed from employment with the Group for any one or more of the following reasons: • Wilful misconduct bringing disrepute to the Group; • Repeated disobedience after prior written warning; • Incompetence in the performance of any duties for which they were employed after written warning; • Fraud or any other dishonesty in respect of the property or affairs of the Group; or • Any other reason based on which the Board believes it is fair and reasonable to warrant that the Incentive Rights lapse and are forfeited. • Certain exceptions to rule 8.1 are specified in rule 8.2. Rule 10 of the IRP Rules states that in the event of inconsistency between the terms and conditions of the IRP Rules and the Listing Rules then the Listing Rules will prevail. Rule 12 of the IRP Rules states that where there is a Change of Control Event the Vesting Conditions of the Incentive Rights are deemed to have been satisfied or waived by the Board and the Incentive Rights may be exercised immediately. Company A Share Trust (the Trust) Company A has established a trust (Trust) under the Company A Employee Share Trust Deed (Trust Deed) which will be used to administer the IRP. Company B has been appointed under the Trust Deed as the Initial Trustee (Trustee). Company A will incur various costs in relation to the implementation and on-going administration of the Trust including, but not limited to: • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information to employees; • management of employee termination; and • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Eligible Employees); • other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the Trust.. Clause 1 of the Trust Deed defines the following relevant terms: Allocated Share means, at a given time, a Trust Share that is credited to the Trust Share Account of a Participant at that time. Board means the board of directors of the Company, a committee appointed by the board of directors of the Company as constituted from time to time, or, in respect of a matter, any person (including, where applicable the Board) who is provided with delegated authority by the board of directors of the Company from time to time in respect of that matter. Group means the Company and each of its Subsidiaries from time to time. Group Company means any member of the Group. Participant means a participant under a Plan who has one or more Trust Shares credited to their Trust Share Account. Rights Issue means an issue by the Company of rights (not being by way of a Bonus Issue) to acquire Shares or other securities. Share means a fully paid ordinary share in the capital of the Company. Terms of Participation means, in respect of a Participant, the specific terms upon which the Shares or other equity awards (whichever applicable) are granted to the Participant (whether set out in the terms of invitation or offer or otherwise). Trust Share means a Share held by the Trustee subject to this Deed and includes any bonus shares issued in respect of the Share under any Bonus Issue and any Share issued as part of a Rights Issue in respect of the Share. Unallocated Share means, at a given time, a Trust Share that is not credited to the Trust Share Account of a Participant at that time. Withdrawal Notice means a written notice given or deemed to be given by a Participant to the Board requesting that some or all of the Participant's Allocated Shares be sold or transferred to the Participant or to a person nominated by the Participant, which notice must: (a) be signed by or on behalf of the Participant; (b) specify the number of Allocated Shares to be sold or transferred; and (c) be in the form approved by the Board. Clause A of the Recitals of the Trust Deed states that the Trust was established for the purpose of acquiring, holding and transferring Shares in connection with equity incentive plans established by Company A for the benefit of participants in those plans. Clause 3.1 of the Trust Deed states that the Trustee must hold a Participant's Allocated Shares, the proceeds arising from any sale by the Trustee of rights under a Rights Issue relating to a Participant's Allocated Shares and all other benefits and privileges related to or arising from a Participant's Allocated Shares on trust for and on behalf of the Participant under the terms of the Trust Deed. Clause 4.3 of the Trust Deed states that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, clause 4.3 of the Trust Deed recognises that Company A must pay to the Trustee from Company A's own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by Company A and the Trustee. Clause 4.3 of the Trust Deed recognises that the Trustee is entitled to retain for its own benefit any such fees, commission, remuneration or reimbursement. Clause 4.9 of the Trust Deed states that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997. Clause 5.1 of the Trust Deed states that the Board: • May by notice in writing (Dealing Notice) instruct the Trustee from time to time to: • Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Allocated Shares in respect of an identified Participant or Participants. • Subscribe for, purchase or allocate a number of Shares specified in the Dealing Notice to be held by the Trustee as Unallocated Shares; • Participate in any Rights Issue in respect of a Trust Share; or • Dispose of any rights issued under any Rights Issue in respect of a Trust Share. • Must in a Dealing Notice requiring the Trustee to incur costs in connection with the relevant dealing: • Offer to have one or more members of the Group provide funding (whether by capital contribution, loan or otherwise) to the Trust for the purpose of meeting such costs; • Require the Trustee to apply some of the available capital of the Trust for the purpose of meeting such costs; • Effect a combination of the above. Clause 5.2 of the Trust Deed states that if the Trustee on receiving a Dealing Notice has received sufficient funds or has sufficient capital then it must: • Purchase the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally; • Subscribe for the requisite number of Shares on behalf of the relevant Participant or Participants or beneficiaries of the Trust generally; • Allocate any Unallocated Shares to one or more Participants; or • Participate in any Rights Issues in respect of a Trust Share; or • Dispose of any rights issued under any Rights Issue in respect of a Trust Share; or • Effect a combination of the above. Clause 5.3 of the Trust Deed states that: • Company A must provide the Trustee, or cause the Trustee to be provided with, any funds required by the Trustee to comply with its obligations under Clause 5.2 of the Trust Deed. • All funds provided to the Trustee by Company A: • Will constitute accretions to the corpus of the Trust and will not be repayable by the Trustee unless funds are provided by way of loan; and • May be paid to Company A as consideration for the subscription for Shares provided such Shares are held under the terms of the Trust Deed. • If the Trustee acting reasonably and in good faith considers the terms of any funding would materially prejudice the ability of the Trustee (in its capacity as trustee of the Trust) to meet its debts as and when they fall due, the Trustee is entitled to refuse such funding and the relevant Dealing Notice will be invalid to the extent that the requisite dealings in Shares cannot be satisfactorily funded. Clause 7.4 of the Trust Deed states that if the Trustee subscribes for Shares, on behalf of a Participant, the Trustee must hold those Shares as Allocated Shares for that Participant. Clause 9.3 of the Trust Deed states that the Trustee must do all things required by it to transfer some or all of a Participant's Allocated Shares to the relevant recipient and pay to the Participant any other monies held on the account for the Participant: • On receipt of a valid Withdrawal Notice that has been approved by the Board; • Where required to do so by the IRP Rules and Terms of Participation; • If the Trust is terminated; or • If the Trustee so determines following a written instruction from the Board. Clause 10 of the Trust Deed states that upon the sale of any Allocated Shares the Trustee must apply the proceeds of sale: • First, in payment of any brokerage and other third party costs and expenses of the sale incurred or to be incurred by the Trustee; and • Second, the balance (if any) in payment to the relevant Participant. Clause 13 of the Trust Deed states that Company A indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed. Clause 13 of the Trust Deed also states that if the Trustee does not have sufficient available funds then Company A indemnifies the Trustee in respect of any tax payables in respect of Unallocated Shares. Clause 15.2 of the Trust Deed states that, amongst other things, in the event that the Trust is terminated then any surplus assets of the Trust must be applied in whole or in part for the benefit of either one or both of the following beneficiaries as the Trustee thinks fit: • Any employee incentive trust established and maintained for the benefit of employees; and • Any charity with deductible gift recipient status. Clause 15.3 of the Trust Deed states that the Trustee must not pay any of the surplus assets under clause 15.2 to any Group Company.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 s ubsection 177F(1) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The general deduction provision is section 8-1 of the ITAA 1997 which states: (a) 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. (b) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Losses or outgoings To claim a deduction under subsection 8-1(1) of the ITAA 1997 contributions made to the Trustee by Company A must be irretrievable and non-refundable. Clause 5.1 of the Trust Deed provides that Company A must provide sufficient funds to the Trustee to pay any costs incurred by the Trustee in connection with any Dealing Notice under clause of the Trust Deed. Pursuant to Clause 5.2 of the Trust Deed, Company A will issue Company A shares to the Trustee or direct the Trustee to acquire Company A shares on market. The Trustee holds those Company A shares as Allocated Shares on behalf of each Participant which includes each Incentive Rights Holder for the purposes of the IRP Rules. Clause 5.3 of the Trust Deed provides that Company A must provide the Trustee with all funds required by the Trustee to enable it to subscribe for or acquire Company A shares that it is directed to subscribe for or acquire by the Board. The funds provided constitute accretions to the corpus of the trust and will not be repayable by the Trustee unless they are provided by way of loan. Clause 13 of the Trust Deed provides that Company A indemnifies the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution or purported execution of powers, authorities or discretions vested in the Trustee under the Trust Deed. Clause 13 of the Trust Deed also provides that if the Trustee does not have sufficient available funds then Company A indemnifies the Trustee in respect of any tax payables in respect of Unallocated Shares. Clause 15.2 of the Trust Deed provides that, amongst other things, in the event that the Trust is terminated then any surplus assets of the Trust must be applied in whole or in part for the benefit of either one or both of the following beneficiaries as the Trustee thinks fit: • Any employee incentive trust established and maintained for the benefit of employees; and • Any charity with deductible gift recipient status. Clause 15.3 of the Trust Deed provides that the Trustee must not pay any of the surplus assets under clause 15.2 to Company A or any Group Company. The terms of the Trust Deed when considered together demonstrate that contributions made by Company A to the Trustee, being those contributions which are not made by way of loan, will be irretrievable and non-refundable and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. Sufficient nexus In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities has established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus ( The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). The contributions made by Company A to the Trustee of the Trust are part of the overall employee remuneration costs of Company A. The benefits provided to Directors and employees of the Group under the IRP are to encourage them to remain with the Group, improve longer-term performance of the Group and to recognise the contribution of the Directors and employees to the success of the Group. A sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the Trust) and the derivation of assessable income for the purposes of subsection 8-1(1) of the ITAA 1997. Capital or revenue? Company A will make periodic contributions to the Trustee of the Trust in order to operate the IRP for the purpose of enabling the Trustee to acquire or subscribe for ordinary shares in Company A. In ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the Trustee of its employee share scheme to acquire a share or right under the employee share scheme, the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1 of the ITAA 1997. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 payments by an employer company to an employee share trust, established to provide incentive payments to employees, were held to be on revenue account and were not capital or of a capital nature. | Detailed Reasoning - Apportionment: The combined operation of subsection 8-1(1) and subsection 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant in the circumstances where the Trustee of the Trust uses contributions received from Company A to subscribe for shares in Company A for the purposes of administering the IRP. A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of the year to year benefits that the employer derives from a loyal and contented workforce. Where the trustee of an employee share trust, ultimately and in substance, uses a contribution from the employer to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature. Where a contribution secures for the employer advantages of both a revenue and capital nature, but the expected advantages of a capital nature are very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Private or domestic in nature Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the Trust are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1936 or ITAA 1997. Conclusion The irretrievable contributions Company A makes to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Company A shares in accordance with the Trust Deed and the IRP Rules will be an allowable deduction to Company A under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Company A will incur costs in relation to the implementation and ongoing administration of the Trust including, but not limited to: • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information to employees; • management of employee termination; and • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to Eligible Employees); • other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the Trust. Clause 4.3 of the Trust Deed provides that the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration for operating or administering the Trust. However, Company A may pay to the Trustee from Company A's own resources any such fees, commission or other remuneration and may reimburse such expenses incurred by the Trustee as agreed from time to time by Company A and the Trustee. The Trustee is entitled to retain for its own benefit any such fees, commission, remuneration or reimbursement. The costs incurred by Company A in relation to the implementation and on-going administration of the Trust are deductible under section 8-1 of the ITAA 1997 as either: • costs incurred in gaining or producing the assessable income of Company A; or • costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the detailed reasoning above in question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Company A is entitled to an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the Trust. | Detailed Reasoning - Question 3: The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. Section 83A-210 of the ITAA 1997 provides that if: (a) at a particular time, you provide another entity with money or other property: (i) under an arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 of the ITAA 1997 applies under an arrangement where there is a relevant connection between the irretrievable cash contributions, provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme, in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Arrangement The implementation of the IRP, establishment of the Trust and provision of money by Company A to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997. ESS interest An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company. Under the IRP, each right provided to a Eligible Employee when an offer is made under the IRP Rules is an ESS interests as it is (or may later become) a right to acquire a beneficial interest in a share in a company (Company A). Employee share scheme Subsection 83A-10(2) of the ITAA 1997 defines 'employee share scheme' as: a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of: (a) the company; or (b) subsidiaries of the company; in relation to the employees' employment. For the purposes of subsection 83A-10(2) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 defines the term 'scheme' as follows: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The IRP is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement which provides an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share) to an Eligible Employee in relation to their employment in Company A in accordance with the Trust Deed. A Company A share acquired by the Trustee to satisfy a right provided under the ESIRP, to an employee in relation to the employee's employment with Company A, is itself acquired under the same employee share scheme, being the IRP. Relevant connection The making of offers under the IRP Rules, the provision of irretrievable cash contributions to the Trustee of the Trust, the acquisition and holding of the Company A shares by the Trustee of the Trust and the allocation of Company A shares to Eligible Employees are all interrelated components of the IRP. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. The provision of money to the Trustee to acquire Company A shares is for the purpose of enabling Eligible Employees, indirectly as part of the IRP, to acquire relevant rights (that is ESS interests). If Company A provides irretrievable contributions before an Eligible Employee acquires the relevant ESS interests, then section 83A-210 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance, the contribution will only be deductible to Company A in the income year when the relevant rights (ESS interests) are provided to an Eligible Employees. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . Indeterminate rights Incentive Rights provided under the IRP Rules may be indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because, depending on the conditions attaching to an Incentive Right, it may be uncertain at the time of issue whether it will be satisfied by delivery of a Company A share or the payment of a cash equivalent. In those instances an Incentive Right will not be a right to acquire a beneficial interest in a share unless and until the time when the Board determines that the Incentive Right will be satisfied by the provision of a fully paid ordinary share in Company A. Once that is determined, section 83A-340 of the ITAA 1997 will operate to treat such an Incentive Right as though they had always been rights to acquire beneficial interests in shares. If irretrievable contributions are provided to the Trustee before an Incentive Right is acquired and the Incentive Right subsequently becomes an ESS interest then section 83A-340 of the ITAA 1997 operates to deem the Incentive Right to always have been ESS interest. In such a situation section 83A-210 of the ITAA 1997 will apply retrospectively to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case, a deduction to fund the exercise of the Incentive Right would be available to Company A in the income year in which Eligible Employee acquired the Incentive Right. | Detailed Reasoning - Note: Where the Incentive Rights do not become ESS interests because they are ultimately satisfied in cash the outgoing should not flow through the Trust. That is because the Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997. As discussed in the analysis above, section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests. Section 83A-210 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares where the contribution is made after the acquisition of the relevant rights. In such a situation the irretrievable contributions made by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made where relevant rights are ultimately satisfied by the provision of a fully paid ordinary share in Company A. | Detailed Reasoning - Question 4: Ordinary Income Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. Jordan CJ considered the definition of 'income' 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 an employee share scheme, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee. The character of the right or thing disposed of in exchange for the receipt can determine the character of the contribution received by Company A from the Trustee. Under this arrangement, Company A issues the Trustee with a new share in itself. The character of the newly issued share is one of capital. Therefore, the receipt, being the subscription proceeds, takes the character of share capital, and, accordingly, is of a capital nature. This is consistent with the ATO view expressed in ATO ID 2010/155 Income Tax - Employee Share Scheme : assessability to an employer of the option exercise price paid by an employee . Subscription proceeds received by Company A from the Trustee of the Trust where the Trustee has subscribed for new shares in Company A to satisfy obligations to Interest Rights Holders under the IRP are a capital receipt. That is, subscription proceeds will not be received on revenue account and will not be ordinary income under section 6-5 of the ITAA 1997. Section 20-20 of the ITAA 1997 Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. Company A will receive an amount when the Trustee of the Trust subscribes for shares in Company A. There is no insurance contract in this case, so the amount received is not received by way of insurance. Further, the amount is not an indemnity because the receipt does not arise under a statutory or contractual right of indemnity, and the receipt is not in the nature of compensation. The amount is not received by way of indemnity. Subsection 20-20(3) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997. Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including 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. To the extent section 8-1 of the ITAA 1997 allows a deduction for bad debts or rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there were a recoupment of that deduction any amount received will be assessable. The amount received by Company A is received in return for issuing shares to the Trustee of the Trust and not as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997. The subscription proceeds received by Company A when the Trustee of the Trust subscribes for shares in Company A will therefore not be an assessable recoupment under section 20-20 of the ITAA 1997. Capital Gains Tax (CGT) Under section 102-20 of the ITAA 1997 you make a capital gain or loss if, and only if, a CGT event happens. The relevant CGT events that may be applicable when the subscription proceeds are received by Company A from the trustee of the Trust when it subscribes for shares in Company A are CGT event D1 (creating a contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). Paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In relation to CGT event H2, paragraph 104-155(5)(c) also states that CGT event H2 does not and CGT event H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee of the Trust. CGT event D1 and H2 therefore do not happen. As no CGT event happens, there is no amount assessable as a capital gain to Company A. If the Trustee of the Trust satisfies its obligations under the Trust Deed by subscribing for new shares in Company A, then the subscription proceeds received by Company A will not be included in the assessable income of Company A under section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997, and nor will a CGT event happen under Division 104 of the ITAA 1997. | Detailed Reasoning - Question 5: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met: 1. there must be a scheme within the meaning of section 177A of the ITAA 1936 2. a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and 3. having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. On the basis of an analysis of these three requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by Company A for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A. | Detailed Reasoning - Question 6: The liability of an employer 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 for the relevant year of tax. Under the FBTAA 1986, the calculation of the fringe benefits taxable amount is made by reference to the taxable value of each fringe benefit provided. Without the provision of a 'fringe benefit' no amount will be subject to FBT. In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The provision of rights Certain benefits however are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA 1986. Paragraph (f) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (f) a payment of salary or wages or a payment that would be salary or wages if salary or wages included exempt income for the purposes of the Income Tax Assessment Act 1936 ; or Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies. The Commissioner accepts that the IRP is an employee share scheme, that the Incentive Rights provided under the IRP are, or may later become in the case of Incentive Rights that are indeterminate, ESS interests and that Subdivision 83A-B or 83A-C will apply to those ESS interests. Accordingly, the provision of Incentive Rights pursuant to the IRP will not be subject to fringe benefits tax because they are either: • a payment of salary or wages (in the case of Interest Rights which are ultimately satisfied with cash) and are thereby excluded from the definition of fringe benefit by paragraph 136(1)(f) of the FBTAA 1986 (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits); or • acquired by employees 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 1986 or The provision of Company A shares As mentioned above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material , rather than a , causal connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee of Company A or one of its subsidiaries participates in the IRP, they obtain an Incentive Right (being a right to acquire a beneficial interest in a share in Company A) and this right constitutes an ESS interest. When the Incentive 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). The benefit that arises to an employee upon the exercise of a vested Incentive Right under the IRP (being the provision of a ordinary share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee but, rather, in respect of the Incentive Right. | Detailed Reasoning - Question 7: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 states that a fringe benefit does not include: (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); Subsection 995-1(1) of the ITAA 1997 states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 The beneficial interest in a share received by an Eligible Employee when an ordinary share in Company A is provided to them under the terms of the IRP Rules is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The IRP is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which rights to acquire ordinary shares in Company A (being ESS interests) are provided to employees in relation to the employee's employment. Company A has established the Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests acquired by those employees under the IRP Rules. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights are provided to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because: • the Trust acquires shares in a company, namely Company A; and • the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A) are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Trust Deed and IRP Rules. Paragraph 130-85(4)(c) of the ITAA 1997 Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee of the Trust undertake incidental activities that are a function of managing the IRP. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are considered to be merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. Clause 4.9 of the Trust Deed states that Company A and the Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4) of the ITAA 1997. Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the IRP. Conclusion The Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as: • the Trust acquires shares in a company (being Company A); • the Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the Trust Deed and IRP Rules; and • the Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to managing the IRP. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986 therefore excludes the contributions made to the Trustee of the Trust by Company A from being a fringe benefit. The irretrievable contributions made by Company A or any subsidiary member of the Company A tax consolidated group to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in Company A, will not constitute a fringe benefit within the meaning of section 136(1) of the FBTAA 1986. | Detailed Reasoning - Question 8: As mentioned in the answer to question 5, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA 1986. Notably, paragraphs 145 - 148 of PS LA 2005/24 state: 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. The Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, on the application of section 67 of the FBTAA 1986, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of PS LA 2005/24 states: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA 1986. The provision of benefits to the Trustee of the Trust in the form of irretrievable contributions to the Trust and to Eligible Employees as Incentive Rights under the IRP Rules (including Company A shares received by Eligible Employees on the vesting of Incentive Rights) are excluded from the definition of a fringe benefit for the reasons given above in questions 6 and 7. As these benefits have been excluded from the definition of a fringe benefit, no fringe benefit arises and no fringe benefits tax will be payable under the arrangement which includes the Trust. As there would be no fringe benefits tax payable without the use of the Trust (and nor is it likely fringe benefits tax would be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for entering into the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount of Company A, or any subsidiary member of the Company A tax consolidated group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, shares in Company A.

Reasons for decision: Questions 1 to 5 - application of the single entity rule in section 701-1 of the ITAA 1997 | The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence the subsidiary members cease to be recognised as separate entities during the period they are members of the consolidated group with the head company of the group being the only entity recognised for income tax purposes. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997. As a consequence, the actions and transactions of the subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by Company A as the Australian head company of the Company A tax consolidated group. | The SER in section 701-1 of the ITAA 1997 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). Accordingly the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A consolidated group in relation to questions 6 to 8.