Private ruling: Employee Share Scheme - Long Term Incentive Plan
Published: May 2012
Ruling period: Income Tax | Year ended 30 June 2012 Year ended 30 June 2013 Year ended 30 June 2014 Year ended 30 June 2015 Year ended 30 June 2016 Year ended 30 June 2017 | Fringe Benefits Tax

Ruling: Q1: Will Company A obtain an income tax deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by Company A to Company B as trustee (Trustee) of the Company A Long Term Incentive Plan Employee Share Trust (EST) to fund the subscription for or acquisition on-market of Company A shares by the EST? | A1: Yes. | Q2: Are irretrievable cash contributions made by Company A to the Trustee of the EST, to fund the subscription for or acquisition on-market of Company A shares by the EST to satisfy ESS interests, deductible to Company A in the income year they are made when those contributions are made in an income year prior to the year in which the ESS interests have been acquired? | A2: No. | Q3: 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 full, any deduction claimed by Company A in respect of the irretrievable cash contributions made by Company A 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 Rights and shares under the Long Term Incentive Plan (LTIP) by Company A be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A4: No. | Q5: Will the non-refundable cash contributions made by Company A 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 the head company of the Company A Tax Consolidated Group (Group) and is listed on the Australian Securities Exchange (ASX). As Company A is the head company of the tax consolidated group, Company A is taken by virtue of section 701-1 of the ITAA 1997 to be the relevant entity for the purposes of this ruling. On 5 August 2008, Company A received shareholder approval to establish the Company A Long Term Incentive Plan (LTIP). Pursuant to the LTIP, Company A can grant Performance Rights (Rights), being rights to acquire fully paid ordinary shares in Company A, to employees of the Group and employees of entities outside the Group which are part of the wider Company A economic group (Foreign Entities). Under the terms of the Long Term Incentive Plan Rules, as amended (Plan Rules) Company A is obligated to provide shares to participants on the vesting date provided that all vesting conditions have been met. Company A has established the EST to facilitate the provision of fully paid ordinary shares in Company A to employees and executives under the LTIP. The EST is managed by the Trustee and governed by the deed of trust between Company A and the Trustee (Trust Deed). Acquiring shares on-market to satisfy rights (specifically, acquiring shares before they are allocated to a participant) creates administrative difficulties for Company A as Company A is unable to acquire and hold its own shares. The applicant considers that the use of the EST will ease this administrative impost as Company A is able to procure the Trustee to acquire shares to satisfy Rights, before the Rights are exercised. In addition, the applicant believes that using the EST allows Company A to: · warehouse shares in the Trust (that is, acquire and hold shares before they are allocated to LTIP participants); · hedge Rights by funding the acquisition of shares via the EST at the time Rights are issued; · reallocate shares that are no longer required for Rights that are forfeited under the Rules, to satisfy other Rights; and · have greater choice in the source of the shares used to satisfy Rights e.g. market purchase, new issue or other transfer. The LTIP The LTIP is operated for the benefit of employees (both Australian resident and foreign resident employees) employed by entities within the Group and Foreign Entities. In accordance with the Plan Rules, the board of Directors of Company A (Board) may, at its discretion, offer Rights or Phantom Rights to an Eligible Employee (as defined in the Plan Rules). A Right granted pursuant to the LTIP entitles the participant to one fully paid ordinary share in Company A. Unlike Rights, Phantom Rights entitle participants to receive a cash amount on vesting. Phantom Rights are not administered through the EST and are therefore not addressed in this private ruling. An offer of Rights must be in writing, include an Application Form if acceptance is required and must specify, amongst other things stipulated in the Plan Rules, the number of Rights being offered, the Vesting Conditions for the Rights (if any), the Expiry Date (if any) and the Restriction Period (if any). If acceptance of an offer of Rights is required, it may be accepted by an Eligible Employee completing, executing and then returning the Application Form by no later than the date specified in the offer. An Eligible Employee becomes a participant under the LTIP once Rights have been issued to them. Rights held by a participant will vest in and become exercisable upon the satisfying of any vesting conditions specified in the offer and in accordance with the Plan Rules. Rights granted since 2008 are subject to certain vesting and performance conditions. In addition to continuing to be an employee of the Group, the vesting conditions (including performance conditions) that apply to Rights issued in 2011 include Relative Shareholder Return and Absolute Earnings per Share. Rights will generally vest on the Vesting Date (which is typically 1 July following the end of the Performance Period which is three financial years commencing the year in which the Right was granted). No exercise price is payable by a participant on exercise of a Right. Rights will lapse upon the participant ceasing to be an Employee (as defined in the Plan Rules) on or before the Vesting Date unless the participant ceases employment by reason of a Qualifying Cessation, one year after the Performance Period has commenced (in which case a specified portion of the Rights will remain on Issue). A Qualifying Cessation occurs when an employee ceases to be an employee by reason of death, total or permanent disablement, aged-based retirement or other circumstances determined at the discretion of the Board. Under the terms of offer in respect of Rights issued, participants can elect (at the time Rights are issued) for shares allocated after vesting, to be subject to genuine disposal restrictions for a period after the shares are acquired by the participant. During any period of restriction, shares may only be disposed of by participants in certain exceptional circumstances as set out in the offer letter. If no such election is made, no disposal restriction will apply to the shares allocated and the participant is free to dispose of them at any time, subject to Company As Securities Trading Policy. Shares will be allocated to a participant when a Right is exercised. Company A can satisfy Rights by issuing new shares to the Trustee or causing existing shares to be acquired on-market by the Trustee for transfer to the participant, or a combination of these two methods. Operation of the EST The LTIP will be subject to the EST, that is, the Trust Deed and its terms. The applicant advises that the Trust was established to facilitate the allocation of shares to participants in accordance with the LTIP and that Company A and the Trustee have agreed that the EST 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. Company A will provide irretrievable contributions in the form of cash to the EST and the Trustee has agreed to use this money to acquire Company A shares (either on-market or via subscription) to satisfy Rights granted under the LTIP. Accordingly, the following key provisions of the Trust Deed will apply to the LTIP: The EST will be established for the sole purpose of subscribing for, acquiring, holding and allocating shares in Company A under the LTIP. The Trust Deed does not specify when the Trustee must acquire shares to satisfy Rights granted under the LTIP. However, on receipt of the money contributed to it by Company A, the Trustee must, as directed by the Board, apply such money to acquire Company A shares on-market or subscribe for new shares in Company A for the purpose of enabling Company A to satisfy its obligations to allocate shares to participants under the LTIP. Foreign Entities will be required to pay an amount (Recharge Amount) to Company A when Company A makes an irretrievable contribution to the Trustee to enable the EST to satisfy Rights held by employees of Foreign Entities. The Trust Deed provides that subject to the relevant plan rules and terms of participation, each participant is the beneficial owner of the shares held by the Trustee on their behalf and that further, is absolutely entitled to all other benefits and privileges attached to, or resulting from holding those shares. While shares are held in trust, the participant will be entitled to dividend and voting rights. By written notice, participants can apply for legal title to the shares held in the EST to be transferred to them. The applicant has advised that: · this ruling should only address the application of Division 83A of the ITAA 1997; and · Company A will return the Recharge Amount as assessable income pursuant to subsection 6-5(1) of the ITAA 1997 as it considers that the Recharge Amounts are income according to ordinary concepts.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 83A-10 | Income Tax Assessment Act 1997 Section 83A-35 | Income Tax Assessment Act 1997 Section 83A-205 | Income Tax Assessment Act 1997 Section 83A-210 | Income Tax Assessment Act 1997 Subsection 130-85(4) | Income Tax Assessment Act 1997 Section 701-1 | Income Tax Assessment Act 1997 Section 995-1 | 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 | Fringe Benefits Tax Assessment Act 1986 Section 66 | Fringe Benefits Tax Assessment Act 1986 Subsection 136(1)

Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 is a general deduction provision. It states that: 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. Subsection 8-1(2) of the ITAA 1997 then states: 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 Pursuant to a clause of the Trust Deed, Company A must provide the EST with funds (contributions) for the purpose of acquiring shares in Company A in accordance with another clause of the Trust Deed. The Trustee will, in accordance with directions received by Company A, purchase, subscribe for or allocate shares for the benefit of participants provided that the Trustee receives sufficient payment to subscribe for or purchase shares. These contributions made to the EST by Company A, being irretrievable, are non-refundable to Company A. On this basis, it is concluded that the irretrievable contributions made by Company A are considered to be a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. Relevant nexus The purpose of Company A in establishing and making irretrievable contributions to the EST is to provide benefits to certain eligible employees in the form of shares in Company A, provided certain conditions as detailed in the Plan Rules, are satisfied. As stated by the applicant in its application, the contributions to the EST by Company A should be viewed '…as an outgoing incurred for the purpose of motivating and remunerating employees'. This aligns employee and shareholders interests and in doing so, should encourage participants to improve the longer-term performance (and assessable income) of Company A. Accordingly, there is a sufficient nexus between the outgoings (Company As contributions to the EST) and the derivation of its assessable income ( Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295;(1935) 3 ATD 288, W Nevill & Co Ltd v FC of T (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). Capital or Revenue? The contributions by Company A will be recurring and made from time to time, as and when Company A shares are to be subscribed for or acquired by the Trustee pursuant to the Trust Deed. Therefore, to this end, it is concluded that the contributions are not capital in nature, but rather outgoings incurred by Company A in carrying on its business. In support of this conclusion, the Court held in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745 that payments by an employer company to an EST established for the purpose of providing incentive payments to employees were on revenue account and not capital or of a capital nature. This Commissioner considers that a company will be entitled to a deduction under section 8-1 of the ITAA 1997 for irretrievable contributions made by the company to the Trustee of its employee share scheme. Finally, nothing in the facts suggests that the contributions 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 1997 or the ITAA 1936. Accordingly, Company A is entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of the irretrievable cash contributions made to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST. Section 83A-210 of the ITAA 1997 states: If: (a) at a particular time, you provide another entity with money or other property: (a) under an arrangement; and (b) for the purposes of enabling an individual (the ultimate beneficiary ) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time ) the ultimate beneficiary acquires the ESS interest; then, for the purposes of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Arrangement The adoption of the Plan Rules and the creation of the EST constitute the arrangement in these circumstances for the purposes of paragraph 83A-210(a)(i) of the ITAA 1997 and the provision of money to the Trustee necessarily allows the 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) of the ITAA 1997). An ESS interest is a beneficial interest in a share in a company or a right to acquire a beneficial interest in a share in a company (subsection 83A-10(1) of the ITAA 1997). Under the LTIP, a Right granted to an employee will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. This ESS interest will also be granted under an employee share scheme as it is granted in relation to the employee's employment. A share acquired by the Trustee to satisfy a right to acquire a share, granted under the employee share scheme to an employee in relation to the employee's employment, is itself provided under the same scheme. The granting of the beneficial interests in the Rights, the provision of the money to the Trustee under the arrangement, the acquisition and holding of shares by the Trustee and the allocation of shares to the participating employees are all interrelated components of the LTIP. All the components of the scheme 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. Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling the participating employees, indirectly as part of the LTIP, to acquire Rights. Timing - acquisition time Contribution made in an income year prior to the income year that Rights are acquired The acquisition time for the purposes of paragraph 83A-210(b) of the ITAA 1997 will occur when the Rights (that is, the ESS interests) are granted to participants. Accordingly, when Company A makes a cash contribution to the Trustee in an income year before the income year in which the acquisition time for the Rights occurs, it will be allowed a deduction pursuant to section 83A-210 of the ITAA 1997 in the later income year in which the ESS interests (Rights) are granted (acquired). It should be noted that if any amount of money is provided to the Trustee to purchase excess shares intended to meet a future obligation arising from a future grant of Rights, the excess payment will occur before the employees acquire the relevant Rights (ESS interests) under the scheme. Section 83A-210 of the ITAA 1997 will apply in that case and the excess payment will only be deductible to Company A in the later year of income when the Rights are subsequently granted to (acquired by) participants. Contribution made after the income year in which the Rights are acquired Section 83A-210 of the ITAA 1997 will not apply if Company A makes cash contributions in an income year that is later than the income year in which the Rights are granted. In this case, the cash contribution will be deductible under section 8-1 of the ITAA 1997 in the income year in which the loss or outgoing is properly incurred i.e. in the later income year. Contribution made in the same year the Rights are acquired Section 83A-210 of the ITAA 1997 will still apply to determine the timing of the deduction for the contribution if the contribution is made in the same year as, but before the Right is acquired. In this case, the deduction is not available until the Right is acquired. Company A will therefore be entitled to the deduction in the year the contribution is made as this is this also the same year the Right is acquired. If the contribution is made in the same year as, but after the Right is acquired, then section 8-1 of the ITAA 1997 will apply. Under section 8-1 of the ITAA 1997, the contribution will be deductible in the same income year the Right was acquired as this is also the income year in which the loss or outgoing was incurred. Law Administration Practice Statement PS LA 2005/24 deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met. These are: · there must be a scheme within the meaning of section 177A of the ITAA 1936 · a tax benefit arises that was obtained or would be obtained in connection with the scheme but for Part IVA of the ITAA 1936 and · having regard to the matters in paragraph 177D(b) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. The Scheme A scheme is defined in subsection 177A(1) of the ITAA 1936 which states: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct It is considered that this definition is sufficiently wide to cover the proposed employee arrangement under the LTIP, which consists of the creation of the EST, including the Trust Deed, and the payment of the irretrievable cash contributions to the Trustee. Tax Benefit 'Tax benefit' is defined in subsection 177C(1) of which the relevant paragraph is: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (b) a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out; In order to determine the tax benefit that would be derived by Company A from this scheme, it is necessary to examine alternative hypotheses or counterfactuals, that is, other schemes the company might reasonably have been expected to enter into to achieve its aims in relation to employee remuneration. The applicant, in its application considers the following alternate actions: As part of the Taxpayer's remuneration strategy, incentives are provided by way of grants of Rights under the LTIP as set out in the LTIP Rules. The alternative to these grants would be payments of salary bonuses or superannuation contributions. In this alternative, the payments of these additional cash amounts would be deductible under section 8-1 of the ITAA 1997. On this basis, we do not consider there to be a tax benefit in relation to the proposed arrangements where the acquisition of Shares is funded to satisfy the LTIP Rights. If however as an alternative Company A issued new shares directly to employees they may not receive a deduction for any amount incurred in issuing the shares. Therefore by using an EST, a tax benefit is created through the deduction they will receive under section 8-1 of the ITAA 1997 for the irretrievable cash contributions they make to the Trustee. Dominant purpose Paragraph 177D(b) of the ITAA 1936 sets out the following matters that must be considered in deciding whether a scheme was entered into for the purpose of obtaining a tax benefit: (ix) the manner in which the scheme was entered into or carried out (x) the form and substance of the scheme (xi) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (xii) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme (xiii) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (xiv) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme (xv) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out (xvi) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi). Subsection 177A(5) of the ITAA 1936 requires the purpose to be the dominant purpose. Therefore in considering whether Part IVA applies or not, the necessary comparison to be made in relation to the matters listed in paragraph 177D(b) of the ITAA 1936 is between the scheme as proposed and the relevant counterfactual. (i) The Manner of the Scheme The inclusion of the EST in the scheme does give rise to a tax benefit, but the company contends that the presence of the EST provides other commercial benefits. In particular, it states in its application that benefits include, amongst other things: · A company is unable to hold its own shares. The Trust is a vehicle which will enable the Taxpayer to effectively acquire and hold its own shares for the purposes of fulfilling its obligations resulting from new and existing grants under the LTIP. · The Trust will facilitate the acquisition of shares either on market or by a new issue of shares by the Company. · The Trust will be an efficient structure for giving effect to disposal restrictions/vesting conditions. As the Trustee is the legal owner, employees have no ability to deal in the shares. · The Trust provides flexibility to acquire and hold shares that will be allocated to employees under the LTIP. When vesting conditions are not met, Rights are forfeited and the Trust enables shares held for such forfeited Rights to be 'recycled' to satisfy other grants of Rights……. Further, it is noted that the arrangement is not deliberately and intentionally established close to the end of the company's income year nor with a large up-front payment intended to provide for the EST's operations for several years into the future, as happened in Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210. It is accepted that the EST provides benefits to the operation of the scheme that would not be available if the shares were provided directly by Company A as in the relevant counterfactual. (ii) The Form and Substance The substance of the scheme is the provision of remuneration in the form of shares to eligible employees who participate in the LTIP (as well as any employees who participate in future employee share equity plans). It takes the form of payments by Company A to the Trustee who acquires the shares and transfers them to participants. While existence of the EST confers a tax benefit, it cannot be concluded that it is the only benefit provided as outlined above. Company A has argued that the form of the arrangement with the EST provides the scheme with multiple non-tax benefits and this is accepted. (iii) The Timing of the Scheme As noted above, the scheme has not been established at a time to provide a substantial year-end deduction to the company nor with a contribution sufficiently large to fund the EST for several years, but by recurring contributions. There is nothing in this factor to suggest a dominant purpose of seeking to obtain a tax benefit in relation to the scheme. (iv) The Result of the Scheme The result of the scheme is to provide Company A with allowable deductions for the contributions it makes to the EST. However, it is noted that the contributions are irretrievable and reflect a genuine non-capital outgoing on the part of the company to achieve a business outcome. It is to be expected that a deduction would normally be allowable in these circumstances. (v) Any Change in the Financial Position of the Company As noted above, Company A makes irretrievable contributions to the EST and those contributions constitute a real expense with the result that the company's financial position is changed to that extent. While it is arguable that the quantum of the deductions is higher with an EST as part of the scheme than would be the case if the company provided shares to participants directly, there is nothing artificial, contrived or notional about Company As expenditure. (vi) Any Change in the Financial Position of other Entities or Persons The contributions by Company A to the EST will form part of the corpus of the EST and must be dealt with by the Trustee in accordance with the terms of the Trust Deed i.e. for the acquisition of shares to provide to participants in employee share schemes. The company is not a beneficiary of the EST and its contributions cannot be returned to it in any form except where the Trustee acquires shares from the company by subscribing for new issues at market value. Therefore, the contributions made by Company A amount to a real change to the financial position of the Trustee. The financial position of participants in the schemes will also undergo a real change. There is nothing artificial, contrived or notional about these changes. (vii) Any Other Consequence Not relevant to this scheme. (viii) The Nature of any Connection between the Company And any Other Persons The relationship between Company A and the participants in the scheme is one of employer/employee. The Trustee is independent of Company A and is under a fiduciary obligation to act in the interests of the employees who participate in employee share schemes and in particular, in this case, the LTIP. The contributions made by the company to the Trustee are commensurate with the company's stated aim of encouraging employees to share in the ownership and the long-term success of the company. There is nothing to suggest that the parties to the employee share schemes are not acting at arm's length to one another. Accordingly, there is nothing in relation to this factor to indicate a dominant purpose of obtaining a tax benefit. Accordingly, 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 in respect of the irretrievable cash contributions made by Company A to the Trustee of the EST to fund the subscription for or acquisition on-market of Company A shares by the EST. The provision of Rights An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (h) of the definition of 'fringe benefit' 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. Subsection 83A -10(1) of the ITAA 1997 defines an ESS interest in a Company As: …a beneficial interest in: (c) a share in the company; or (d) a right to acquire a beneficial interest in a share in the company. Subsection 83A -10(2) of the ITAA 1997 defines an 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: (c) the company, or (d) subsidiaries of the company in relation to the employees employment. Company A has stated that it will grant ESS interests (being the Rights which are rights to acquire a beneficial interest in the share of a company, Company A) to participants of the LTIP. The ESS interests offered to participants under the LTIP are offered in connection with a participant's employment by Company A. It is therefore accepted that the LTIP comprises an employee share scheme (that incorporates the use of the EST that is an employee share trust within the meaning of subsection 130-85(4) of the ITAA 1997 - see question 5 below). Accordingly, the acquisition of ESS interests pursuant to the LTIP will not be subject to fringe benefits tax on the basis that they are acquired under an employee share scheme (to which Subdivision 83A-B or 83A-C of the ITAA 1997 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. The provision of shares As stated above, in general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' 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. The court at ATC 4158 said: 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, casual connection or relationship between the benefit and the employment. The situation is similar to that which existed in FC of T 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. The full Federal Court 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 accepts to participate in the LTIP, they obtain a right to acquire a beneficial interest in a share in Company A and this right constitutes an ESS interest. When this right is subsequently exercised, any benefit received would be in respect of the exercise of the right, and not in respect of employment. Therefore, the benefit that arises to an employee upon the exercise of a Right under the LTIP (that is, the provision of a 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. Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 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 ); Employee share trust 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 right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997. An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 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 LTIP 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 (being rights to acquire shares in the company - Company A) are provided to employees in relation to the employee's employment. Under the LTIP, the employer has established the EST to acquire shares in Company A and to allocate those shares to employees to satisfy the Rights acquired under the employee share scheme. The beneficial interest in the share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997. Therefore, paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because: · the EST acquires shares in a company, namely Company A; and · the EST 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 ESS ( as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the governing documents of the scheme. 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 require a Trustee to undertake incidental activities that are a function of managing the employee share scheme and administering the trust. The Commissioner considers that for the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental, include: · the opening and operation of a bank account to facilitate the receipt and payment of money · the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the 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 · 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. For the purposes of the EST, the powers of the Trustee are set out in the Trust Deed. A clause limits the powers given to the Trustee under the Trust Deed as it provides 'Without limiting the generality of.., the Company and the Plan Trustee agree that the Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of section 130-85(4) of the ITAA'. These provisions, collectively, make it clear that the Trustee can only use the contributions received exclusively for the acquisition of shares for eligible employees in accordance with the LTIP. To this end, all other duties/general powers listed in the Trust Deed are considered to be merely incidental to the functions of the Trustee in relation to its dealing with the shares for the sole benefit of participants in accordance with LTIP. Conclusion The EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the EST in acquiring and providing ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 as concluded above, and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. Accordingly, as 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, Company A will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of Company A shares in accordance with the Trust Deed.

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