Private ruling: Employee share scheme
Date of advice: 12 February 2019
Published: May 2019
Ruling period: Income tax years: | 1 July 20XX to 30 June 20XX | Fringe benefits tax years: | 1 April 20XX to 31 March 20XX

Ruling: Q1: Are the irretrievable cash contributions made the Company to the Trustee to fund: ● the subscription for, or acquisition on-market of, the Company’s Shares, or ● the administration of the Trust a fringe benefit within the meaning of that term in subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | A1: No. | Q2: Will the Company obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by the Company or any of the subsidiary members of the Company’s income tax consolidated group to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, the Company’s Shares by the Trustee to satisfy the Awards granted under the Plans? | A2: Yes. | Q3: Will the Company obtain an income tax deduction pursuant to section 8-1 of the ITAA 1997 in respect of the costs incurred in relation to the on-going administration of the Plans and the Trust? | A3: Yes. | Q4: Under section 83A-210 of the ITAA 1997, is a deduction for the Company in respect of an irretrievable contribution to the Trust allowed in the year of income when the contribution is made if the contribution is in respect of rights to acquire the Company’s Shares previously granted to employees under the Plans? | A4: Yes. | Q5: Will the Commissioner 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 under section 8-1 of the ITAA 1997 claimed by the Company in respect of: ● irretrievable cash contributions made by the Company (including contributions made by subsidiary members of the Company’s income tax consolidated group) to the Trustee of the Trust to fund the subscription for, or acquisition on-market of the Company’s Shares granted under the Plans, or ● costs incurred by the Company (including costs incurred by subsidiary members of the Company’s income tax consolidated group) in relation to the on-going administration of the Plans and the Trust? | A5: No.

Relevant facts and circumstances: Background The Company is an Australian resident company that is listed on the Australian Stock Exchange. The Company operates an employee share scheme (the Plans) as part of its remuneration strategy. The Plans The Company has established the Plans as part of its long term strategy of creating shareholder wealth and as a means of rewarding and incentivising its employees to share in the ownership of the Company. Under the Plans, employees are invited to apply for ESS interests subject to conditions imposed by the Board. The Plans aim to: ● assist in the reward, retention and motivation of employees ● align the interests of employees with the interest of the Company’s Shareholders ● promote the long-term success of the Company and provide greater incentive for employees to focus on the Company’s long term goals ● link the reward of employees to the performance of the Company and the creation of Shareholder value, and ● provide employees with the opportunity to share in any future growth in value of the Company. The Company’s remuneration strategy is designed to attract, motivate and retain high performing individuals. The Plans seek to reward high performance and achievement of shareholder value growth. The Trust The Company established the Trust for the purpose of obtaining the Company’s Shares for the benefit of participating employees under the Plans. This includes subscribing for and/or acquiring Shares on market, allocating, holding and delivering shares in the Company under the Plans. Rationale for utilising the Trust to administer the Plans The reasons for administering the Plans via the Trust include: ● the Trust provides employees with the knowledge that the Shares, and any incidental divided income or associated rights, are held independently of the Company and the Trustee has a fiduciary obligation to act in the interests of its beneficiaries ● the Trust can enable the Shares to be acquired progressively over time either on-market or via subscription ● The Company can manage its costs and share capital position by having the Trust acquire Shares to hold on behalf of Participants for a period of time, before the employees meet the vesting criteria or otherwise become entitled to Shares ● the Trust provides the opportunity to improve cash flow planning as the Company can make contributions to the Trust periodically throughout the vesting period, thus giving the Company the flexibility to determine the most appropriate time to make contributions, and ● the Trust is the most appropriate vehicle to be used to acquire Shares and accumulate dividend income during the vesting period or restriction period for the purpose of acquiring further Shares and meeting the cost of the Plans.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Income Tax Assessment Act 1936 Part IVA | 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 1997 section 8-1 | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the subscription for or acquisition on-market of Shares, or the administration of the Trust will not constitute a ‘fringe benefit’ for the purposes of subsection 136(1) the FBTAA. | Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA provides a ‘fringe benefit’, in relation to an employee, is a benefit in respect of the employment of the employee. However, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); Employee share trust An ‘employee share trust’ is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an ‘employee share scheme’ (having the meaning given by subsection 83A-10(2)) is defined as 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 interest in those shares or rights are provided under the employee share scheme to employees, or 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 and employee share scheme The terms ‘ESS interest’ and ‘employee share scheme’ are defined in section 83A-10 which states: (1) An ESS interest, in a company, is a beneficial interest in: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company. (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 employee’s employment. The Trustee is empowered under the Trust Deed to subscribe for or purchase Shares in accordance with the Company’s direction to be held on Trust until they are allocated to a Participant. The Trustee is not permitted to carry out any activities in its capacity as the Trustee which are not matters connected to or for the purposes of the Plans. Further, the Trustee of the Trust is not permitted to do anything that may cause the Trust to fail the definition of an ‘Employee Share Trust’. An Award granted to an employee will be an ‘ESS interest’ as it is a beneficial interest in a right to acquire a beneficial interest in a Share. This ESS interest is granted under the Plans in relation to a Participant’s employment. Therefore, the Plans will be an ‘employee share scheme’ for the purposes of subsection 83A-10(2). Accordingly, irretrievable cash contributions made by the Company to the Trustee of the Trust under the Plans will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Summary: The Company as the head company of the Company’s income tax consolidated group will be entitled to deduct an amount under section 8-1 in respect of the irretrievable cash contributions to the Trustee of the Trust to fund the subscription for or acquisition on-market of the Company’s Shares by the Trustee to satisfy the Awards granted under to the Plans. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) is a general deduction provision. Broadly, it provides an entitlement to a deduction from your assessable income for any loss or outgoing to the extent that it is: ● incurred in gaining or producing your assessable income, or ● necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, subsection 8-1(2) prevents such a deduction to the extent that the outgoing is: ● capital or of a capital nature, or ● of a private or domestic nature, or ● incurred in gaining or producing exempt income, or ● prevented from being deductible under a specified provision of the ITAA 1997 or the ITAA 1936. Positive limbs For a deduction to be allowable under subsection 8-1(1), there must be a nexus between your loss or outgoing and gaining or producing of assessable income, or the loss or outgoing was incurred in carrying on business for the purpose of gaining or producing your assessable income. The expenditure must be incidental and relevant to the production of your assessable income ( Ronpibon Tin NL and Tongkah Compound NL v. FCT (1949) 78 CLR 47 at 56-7). The purpose of establishing the employee share scheme is to reward, retain and motivate employees and to encourage participation by employees through share ownership. The irretrievable cash contributions that the Company makes to the Trustee of the Trust are employee remuneration costs. They are directly related to the production of the Company’s assessable income. Therefore, subsection 8-1(1) is satisfied. Negative limbs The relevant negative limb is paragraph 8-1(2)(a) which provides that a loss or outgoing is not deductible under section 8-1 to the extent that it is a loss or outgoing of capital, or of a capital nature. The leading authority on the distinction between outgoings of a revenue nature and a capital nature is Sun Newspapers Ltd v. FC of T (1938) 61 CLR 337. Dixon J stated (at 359): The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure, or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay, the difference between the outlay and the returns representing profit or loss. Dixon J identified capital outgoings as those that had a lasting importance to the taxpayer’s profit-yielding structure and stated (at 363) there were three matters to be considered: ● the character of the advantage sought ● the manner in which is to be used, relied upon or enjoyed, and ● the means adopted to obtain it. In Pridecraft Pty Ltd v. FCT ; FCT v. Spotlight Stores Pty Ltd [2004] FCAFC 339; 2005 ATC 4001, the Full Federal Court held (at [95] – [100] per Sackville J, with whom Ryan and Sundberg JJ agreed) that payments by an employer company to a trust established for the purpose of providing incentive payments to employees were on revenue account, and not outgoings of capital or of a capital nature. The irretrievable cash contributions that the Company makes to the Trustee of the Trust are not outgoings of capital or of a capital nature. Therefore, paragraph 8-1(2)(a) is satisfied. Accordingly, the irretrievable cash contributions made by the Company to the Trustee of the Trust to fund the acquisition of the Company’s Shares will be an allowable deduction to the Company under section 8-1. | Summary: The Company will obtain an income tax deduction, pursuant to section 8-1, in respect of costs incurred by the Company in relation to the on-going administration of the Plans and the Trust. | Detailed Reasoning - Detailed reasoning: The Company will incur costs in relation to the establishment and implementation of the Trust. The Company will also incur further costs associated with the services provided by the Trustee of the Trust in respect of the on-going administration and management of the Trust. Those costs are likely to include: ● employee plan record keeping ● production and dispatch of holding statements to employees ● provision of annual income tax return information ● acquisition of shares and allocation to Participants, and ● management of employee termination. In accordance with the Trust Deed, the Trustee is not entitled to receive from the Trust any remuneration in respect of its performance of its obligations as trustee of the Trust. The costs incurred by the Company in relation to on-going administration of the Trust are deductible as outgoings under subsection 8-1(1) as either: ● costs necessarily incurred in gaining or producing the assessable income of the Company, or ● costs necessarily incurred in carrying on the business of the Company for the purpose of gaining or producing the assessable income of the Company. The view that the employer costs incurred by the Company are deductible as outgoings necessarily incurred under subsection 8-1(1) 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. Further, consistent with the analysis in Question 2 above, the costs are revenue and not capital in nature on the basis that they are regular and recurrent expenses incurred by the Company in connection with its employees. The employer costs are therefore not excluded from being specifically deductible under paragraph 8-1(2)(a). Also, nothing in the facts suggests that costs should be excluded from being deductible under the other exclusions within the negative limbs of subsection 8-1(2). Accordingly, the Company is entitled to an income tax deduction, pursuant to section 8-1, in respect of employer costs incurred by the Company in relation to the on-going administration of the Trust. | Summary: If cash contributions are provided by the Company to the Trustee of the Trust before the ultimate beneficiaries acquire ESS interests, section 83A-210 will apply. The effect is that the Company must delay the deduction of the related cash contributions until the ultimate beneficiaries acquire the ESS interests. | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the Company incurred the outgoings. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 states 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 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 interest. Arrangement An adoption of the Plans, their respective Plan Rules and the associated employee share trust, constitutes an arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) and the provision of money to the Trustee necessarily allows each scheme to proceed. Acquiring an ESS interest ‘…directly or indirectly…’ An employee share scheme is a scheme under which ESS interests in a company are provided to employees of a company, or their associates, in relation to their employment (subsection 83A -10(2)). An Award is an ‘ESS interest’ is in the Company under subsection 83A-10(1) as it is a right to acquire a share in the Company. This ESS interest in the Company is provided to employees under the Plans in relation to their employment. Therefore, the Plans comprise an ‘employee share scheme’ under subsection 83A-10(2). The provision of cash contributions by the Company to the Trustee of the Trust is for the purpose of enabling employees (each an ‘ultimate beneficiary’ as defined in paragraph 83A-210(a)) to acquire, directly or indirectly, an ESS interest under an employee share scheme (i.e. the Plans) in relation to the ultimate beneficiary’s employment. Timing – acquisition time Contribution made in an income year prior to income year that Awards were acquired The acquisition time for the purposes of paragraph 83A-210(b) will occur when the Awards are granted to Participants. Accordingly, when the Company makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time of these ESS interests occurs the timing of the deduction allowable under section 8-1 will be determined by section 83A-210 as being the later income year in which these ESS interests are granted. Contribution made after the income year in which Awards are acquired Section 83A-210 will not apply if the Company makes cash contributions in an income year that is later than the income year in which the Awards are granted (acquired). In this case, the cash contribution will be deductible under section 8-1 in the income year in which the loss or outgoing is properly incurred (i.e. in the later income year). | Summary: On the basis of the ‘Relevant facts and circumstances’ in this private ruling, it cannot be objectively concluded that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain a tax benefit in connection with the scheme. | Detailed Reasoning - Detailed reasoning: Part IVA is a general anti-avoidance provision. It gives the Commissioner the power to cancel a tax benefit that has been obtained by a taxpayer, or would be obtained, but for section 177F, in connection with a scheme to which Part IVA applies. The following requirements must be met before the Commissioner can make a determination under subsection 177F(1): ● a ‘tax benefit’, as defined in section 177C, has been obtained or would (but for subsection 177F(1)) be obtained ● the ‘tax benefit’ was, or would have been, obtained in connection with a ‘scheme’ as defined in section 177A, and ● having regard to the matters in subsection 177D(2), the person who entered into or carried out any part of the scheme did so for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. In this case, the Plans constitute a ‘scheme’ for the purpose of section 177A, and under paragraph 177C(1)(b), the deduction claimed by the Company is a ‘tax benefit’ obtained in connection with the scheme. However, on the basis of the ‘Relevant facts and circumstances’ in this private ruling, it cannot be objectively determined that the person or persons who entered into or carried out any part of the scheme did so for the dominant purpose of enabling the Company to obtain a tax benefit in connection with the scheme. Therefore, the Commissioner will not make a determination under section 177F(1), as a result of section 177D, to deny, in part or in full, a 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, or acquisition on-market of, the Company’s Shares by the Trustee to satisfy the Awards granted under the Plans or costs incurred by the Company in relation to the on-going administration of the Plans and the Trust.

Reasons for decision: Legislative references in this Ruling are to provisions of the ITAA 1936, or to provisions of the ITAA 1997, unless otherwise indicated.