Private ruling: Employee Share Trust
Published: June 2012
Ruling period: 1 July 2012 to 30 June 2016.

Ruling: Q1: Will Company A obtain a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by Company A or a subsidiary member of the Company A income tax consolidated group to the Trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A? | A1: Yes. | Q2: If the answer to question (1) is yes, will section 83A-210 of the ITAA 1997 apply to determine that the deduction will be allowable in the income year when the relevant Options are granted to the Participants and the irretrievable cash contributions has been made to the EST to acquire shares? | A2: Yes. | Q3: Will the Commissioner make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in whole or in part, an allowable deduction in respect of the irretrievable contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST? | A3: No. | Q4: Will the provision of options by Company A to Company A employees or subsidiary member employees under the Incentive Plan be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | A4: No. | Q5: Will the irretrievable cash contributions made by Company A or any other subsidiary member of the Company A Group to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A5: No.

Relevant facts and circumstances: Company A is an Australian public listed company and the head company of an income tax consolidated group. Company A established the Incentive Plan (IP) and received shareholder approval at the Annual General Meeting. The objective of the IP is to attract, retain and motivate employees and to align their interests with those of Company A's shareholders. The IP recognises performance and behaviour that delivers sustainable long-term shareholder value. The IP allows Company A to grant Options to employees with an Offer Notice (Eligible Employee). The Option is an option over an ordinary share in Company A. The Option is an opportunity to purchase one fully paid share in Company A at a date in the future, at an exercise price set by reference to the market value of a Company A share determined at the time the Option is granted, provided specific performance criteria, determined by the Board of Directors of Company A, have been met. The Eligible Employee may accept the Option by completing the Offer Acceptance form. The Eligible Employee becomes a Participant (Participant) of the IP upon receipt by Company A of the Offer Acceptance form. The rules of the IP contain the following general terms: · Employees employed by Company A and any of its wholly owned subsidiaries may be nominated by the Board as being eligible for Options under the IP; · The terms under which the Board may invite Eligible Employees to apply for Options, including setting performance criteria which must be met before any Options vest under the IP; · A prohibition on Participants transferring, assigning, hedging or otherwise dealing with unvested Options; · Options lapse if Participants resign, have their employment terminated for cause, or cease to be engaged for any other reason determined by the Board, except for Participants whose employment is terminated for an approved reason; and · Terms on which the Board may amend the IP and administer the IP. Specific terms apply to each Participant's Options, such as the number of Options to be granted, the performance hurdles which must be met before the Options vest and the vesting period, are to be determined by the Board and specified in the notice inviting the Participant to apply for Incentives under the IP. Options granted under the IP are rights to shares that carry no voting or dividend rights and are granted for no consideration. Options automatically lapse if they do not meet vesting conditions on or before the final vesting date. Company A will give the Participant a written notice informing the Participant when vesting conditions have been satisfied. The participant may acquire the underlying shares by giving a written notice signed and paying the exercise price to Company A. Company A can satisfy Options either through the subscription for new shares or by procuring shares on market. The IP rules allow Company A to appoint a Trustee to assist with the administration of the IP. The Employee Share Trust (EST) was established to facilitate the award of shares under the IP to employees of Company A. A third party trustee company is trustee of the EST. The EST was established to provide commercial benefits that are not available if shares are provided directly by the company: The Trust Deed allows Company A to make contributions to the EST to allow the Trustee to acquire shares for the IP. Under no circumstances may the Trustee repay to Company A any amount received as contributions for the acquisition of Shares, other than by subscribing for shares from Company A. Where Company A determines to satisfy Options with shares for their Participants, Company A will make irretrievable cash contributions to the EST to acquire shares either through the subscription for new issue shares or acquisition through market purchase to satisfy grants made by Company A to the Participants. The Trustee is required to have the trust accounts audited annually, and to account to beneficiaries each year for shares held on their behalf. To date, no irretrievable cash contributions have been made by Company A to the Trustee of the EST. Company A grants Options under the IP on an annual basis and a vesting/exercising event could occur each year which will require Company A to source shares to satisfy the Options. Company A will make irretrievable contributions to the EST to allow the EST to acquire shares to satisfy those Options.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 subsection 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 paragraph 177D | Income Tax Assessment Act 1936 paragraph 177D(b) | Income Tax Assessment Act 1936 s ubsection 177F | Income Tax Assessment Act 1936 s ubsection 177F(1) | 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 subsection 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 section 83A-35 | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 subsection 130-85(4)(a) | Income Tax Assessment Act 1997 subsection 130-85(4)(b) | Income Tax Assessment Act 1997 subsection 130-85(4)(c) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Company A will obtain a deduction under section 8-1 for irretrievable cash contributions made by Company A or a subsidiary member of the Company A income tax consolidated group to the trustee of EST to fund the subscription for, or acquisition on-market of, shares in Company A. | Detailed Reasoning - Section 8-1: The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and it does not fall within any of the negative limbs in subsection 8-1(2). The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature. Company A provides cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan Rules for the sole purpose of subscribing for and/or acquiring Company A shares for the benefit of Participants. Such contributions will be irretrievable or non-refundable to Company A and therefore a loss or outgoing is incurred for the purposes of subsection 8-1(1) The purpose of the contributions is to provide an incentive to employees linked to the performance of the Company A business. Company A grants Options on an annual basis, contributions will be recurring and made from time to time as and when Company A shares are to be subscribed for or acquired pursuant to the Trust Deed. It is concluded that the contributions are not capital in nature, but rather outgoings incurred by the company in carrying on its business. | Summary: Section 83A-210 of the ITAA 1997 will apply to allow a deduction when the relevant Options are granted to the Participants and the irretrievable cash contributions has been made to the EST to acquire shares. | 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 Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. The provision of irretrievable cash contributions to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the Participants, indirectly as part of the IP, to acquire the Options. If the irretrievable cash contributions are provided before the Options are acquired by the Participants, then section 83A-210 will apply. However, section 83A-210 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from Options already granted. 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 Options, the excess payment occurs before the employees acquire the relevant Options (ESS interests) under the scheme. Section 83A-210 will apply in that case and the excess payment will only be deductible to Company A in the income year when the relevant Options are granted to the Participants. | Summary: The Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in whole or in part, an allowable deduction in respect of the irretrievable contributions made by Company A or any subsidiary member of the Company A Group to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A's shares by the EST. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision. It applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme. | Detailed Reasoning - The scheme: The definition of a scheme in subsection 177A(1) of the ITAA 1936 is sufficiently wide to cover the IP, which utilise payments made by Company A to the Trustee (in accordance with the Trust Deed) to fund the acquisition of Company A shares on behalf of Participants by the Trustee. | Detailed Reasoning - Tax Benefit: Tax benefit is defined in subsection 177C(1) of the ITAA 1936 to include: (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 whether a tax benefit has been derived by Company A from the scheme, it is necessary to examine the 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 - other schemes Company A might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in paragraph 177D(b) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme. The Commissioner considers that a tax benefit can be obtained if new shares are issued directly to Participants. Under this alternative, Company A would be entitled to a tax deduction for costs incurred in issuing and transferring the shares to the Participant. However, the maximum deduction available would be limited to $1,000 pursuant to section 83A-205 while no limit applies with the use of the Trust arrangement. Therefore, to the extent the value of the shares provided to a participant exceeds $1,000, a tax benefit would be obtained in connection to the use of the Trust arrangement. | Detailed Reasoning - The applicable purpose test: In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of the EST arrangement. Further, as published in the 'ESS - guide for employers', the Commissioner generally accepts that a general deduction may be available where an employer provides money or other property to an employee share trust to enable it to acquire securities to provide to employees. Therefore, having regard to the eight factors set out in paragraph 177D(b) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company A to obtain a tax benefit. | Summary: The provision of Options by Company A to Company A or subsidiary member employees under the IP will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: A fringe benefit will generally arise where benefits are provided to employees or associates of employees in respect of the employment of the employee. Some benefits are expressly excluded as fringe benefits. Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA, states that a fringe benefit does not include: a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83A-B or 83A-C of that Act applies; The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997. The IP is an employee share scheme as it constitutes an arrangement that is operated in accordance with the Plan Rules and incorporates the use of the EST operated in accordance with the Trust Deed. Under the IP, an ESS interest (being a beneficial interest in an option) is provided to Participants - being employees of Company A or subsidiary members of the Company A Group - in relation to their employment. The ESS interests will be acquired at a discount as the Participants will acquire the Options for no consideration. | Detailed Reasoning - Conclusion: Therefore, the granting of Options under the IP will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Summary: The irretrievable cash contributions made by Company A or any other subsidiary member of the Company A Group to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: 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 ); 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 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). The right to acquire a beneficial interest in a Company A share is an ESS interest within the meaning of subsection 83A-10(1). An employee share scheme is defined in subsection 83A-10(2) as 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 IP is an employee share scheme within the meaning of subsection 83A-10(2) because it is a scheme under which either rights to acquire beneficial interests in shares in Company A are provided to employees in relation to the employee's employment or beneficial interests in shares in Company A are provided to employees in relation to the employee's employment. Under the IP, the employer has also established the EST to acquire shares in Company A and to allocate those shares to employees. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because: · the EST acquires shares in Company A; and · the EST ensures that the ESS interests being beneficial interests in those shares, are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant Rules of the IP. Undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b) will require the Trustee to undertake incidental activities that are a function of managing the IP and administering the EST. For the purposes of paragraph 130-85(4)(c), 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 EST 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. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. Therefore, the EST is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit. | Detailed Reasoning - Conclusion: Accordingly the irretrievable cash contributions made by Company A or any other subsidiary member of the Company A Group to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares, will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Reasons for decision: All subsequent legislative references are to the ITAA 1997 unless otherwise indicated.