Private ruling: Employee Share Trust
Date of advice: 29 November 2016
Published: April 2017

Ruling: Q1: 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 Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group, to Company B (Trustee) as trustee of the Company A Employee Share Trust (EST), to fund the subscription for, or acquisition on-market of, ordinary shares in Company A (Company A shares) by the Trustee? | A1: Yes. | Q2: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to an income tax deduction under section 8-1 of the ITAA 1997 in respect of costs which are incurred in relation to the implementation and on-going administration of the EST? | A2: Yes. | Q3: Will the 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 under section 8-1 of the ITAA 1997 at the 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: Will the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to the trustee of the EST be deductible under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests? | A4: Yes. | Q5: If the Trustee satisfies its obligations under the Company A Limited Long Term Incentive (Option) Plan Rules (Plan) by subscribing for new Company A shares, 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? | A5: No. | Q6: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, the whole or a part of, a deduction claimed by Company A for the irretrievable cash contributions made by Company A or any subsidiary member of the Company A income tax consolidated group to fund the subscription for, or acquisition on-market of, Company A shares by the trustee of the EST? | A6: No. The rulings for questions 1 - 6 inclusive each apply for the following periods: Income tax year ended 30 June 2017 Income tax year ended 30 June 2018 Income tax year ended 30 June 2019 Income tax year ended 30 June 2020 Income tax year ended 30 June 2021 | Q7: Will the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares by the Trustee, be treated as a fringe benefit within the meaning of section 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A7: No. | Q8: Will the provision of Options under the Plan, or Company A shares, to employees, be a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A8: No. | Q9: Will the Commissioner seek to make a determination that section 67 of the FBTAA 1986 applies to increase the aggregate fringe benefits amount by the amount of the tax benefit gained from irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares? | A9: No. The rulings for questions 7 - 9 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: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company A (Company A) is listed on the Australian Securities Exchange (ASX). Company A has one class of shares on issue being ordinary shares. Company A is the head company of an income tax consolidated group comprising itself and other wholly-owned Australian resident subsidiaries (Company A income tax consolidated group). Review of employee remuneration plans Company A has sustained continued growth since its beginnings as a family owned and operated business. The company has become increasingly cognisant of the need to complete the transition from a family owned management model to a truly corporatised entity which is able to operate independently of the original family. In recent times, it has become an internal imperative of Company A to further formalise the company's employee remuneration and capital management strategies to facilitate the next phase of the corporatisation lifecycle. The Board of Company A (Board) recognises that in order to continue the corporate maturation process and also ensure the company's long term financial sustainability, certain aspects of the business need to be addressed, including: ● increasing the depth of high quality employees ● retaining key staff who drive desired behaviours ● developing a culture that promotes discretionary effort ● undertaking more strategic capital management planning In order to achieve these objectives, the Board has engaged external providers to undertake a formal review of its employee remuneration structures to determine whether equity based plans can be managed in a more efficient and flexible manner going forward. As a result, the Company A Long Term Incentive (Option) Plan Rules (Plan) has been developed and Company A intends to grant employee share scheme interests under the Plan in the future. Plan Overview Company A intends to grant options to key management personnel and other eligible employees in order to motivate and retain key employees and to help achieve its overall business objectives and goals. An Option is defined in the Plan as being a right to acquire a Share in accordance with the Plan. A Share is defined in the Plan as an ordinary share in the capital of Company A. Options will only be granted to key management personnel and other eligible employees initially. However, the terms of the Plan or a new remuneration structure may be extended to all employees in the future. The Plan is a long term equity based incentive arrangement whereby Options are granted to provide key management personnel and other eligible employees with the incentive to deliver growth in shareholder value. The key terms of the Plan are as follows: ● the Plan is open to Eligible Employees, being employees as defined in the Plan to whom a grant of Options can been made; ● when an Eligible Employee accepts a grant of Options they become a Participant under the Plan; ● Options may be exercised subject to satisfying certain exercise conditions; ● the number of Options granted to each Eligible Employee is based on a recommendation made by Company A's Chief Executive Officer which will be approved by the Remuneration Committee. At the end of the financial year (30 June), grants may be reduced where specific targets are not met (e.g. Net Profit After Tax (NPAT)); ● the vesting of Options will be dependent on the achievement of: ● Earnings Per Share (EPS) performance of Company A; and ● Continuation of employment; ● the performance hurdles operate so that on the test date, Company A's EPS performance during the performance period is compared to an EPS threshold for allocation and a total target; ● the table below sets out the proportion of the allocation which will vest under the provided arrangement depending on the EPS performance achieved by Company A: EPS performance Proportion of the Allocation which vests Less than the EPS threshold 0% Between the EPS threshold and the EPS target Straight line sliding scale where Company A's EPS performance is calculated as a percentage of the EPS target Equal to or greater than the EPS target 100% ● Company A's EPS performance is tested, initially over a three-year vesting period from the date of grant and if the EPS threshold is not met, it will be subsequently tested over a four-year vesting period against a four-year EPS threshold and EPS target. If the threshold is not met when retesting at the four-year date, the entire grant will lapse; ● the Options lapse at: ● where unvested - at expiration of the relevant Vesting Period (as defined in the Plan ● the Last Exercise Date (as defined in the Plan) ● certain times relating to Good and Bad Leavers (as detailed and explained in the Plan). Review of capital management policies The Board has considered its capital management policies including dividend payout ratios, capital raising (for potential future acquisitions), share buy-backs, and its obligations under the proposed Plan. The Board considers that the establishment of an employee share trust will provide additional flexibility in relation to its capital management plans and also enable Company A to satisfy its obligations under employee remuneration policies. In this regard, the employee share trust will be able to either subscribe for new shares or acquire shares on-market to satisfy its obligations under the proposed Plan. Given current market conditions and the Board's review of their employee remuneration and capital management policies, Company A considers that the Plan could be managed in an efficient and flexible manner through the establishment of an employee share trust. Establishment of an employee share trust The implementation of equity based incentive arrangements using an employee share trust will assist Company A to meet its business objectives and goals by: ● Incentivising, rewarding and retaining current key management personnel and certain other employees; and ● Attracting new employees. Company A will utilise the employee share trust for the Plan. Company is also planning to use the employee share trust for other future equity based remuneration plans. Company A's reasons for using an employee share trust arrangement for the Plan include: ● employee share trusts are common commercial vehicles which have been used by taxpayers for many years to provide remuneration benefits to employees. Their usage is wide spread amongst private and public companies in Australia and overseas, and they provide significant commercial benefits to taxpayers in regards to administration of equity based remuneration strategies (e.g. the trustee function can be outsourced to the share registry provider which can reduce administration costs and the need to obtain an Australian Financial Services Licence); ● provides an arm's length vehicle for acquiring and holding shares in Company A either by way of acquiring shares from another shareholder or by way of a new issue of shares, and can assist Company A in meeting Corporations Act 2001 (Cth) requirements in relation to dealing in its own shares; ● provides Company A with additional capital management flexibility, by allowing the trustee to purchase shares from another shareholder or subscribe for shares to hold on behalf of employees. This flexibility will help Company A to manage its earnings per share, for example; ● assists with managing any insider trading issues as the Trustee, as an independent party, is acquiring shares in accordance with a settled trust deed; ● provides an efficient structure for giving effect to disposal restrictions, forfeiture conditions and other conditions on shares. As a Trustee is the legal owner, employees as beneficial owners have no ability to deal in the shares unless complying with those restrictions or conditions; and ● enables shares in Company A held by the employee share trust to be recycled without increasing the percentage of ownership of other shareholders. When shares are forfeited (e.g. on termination of employment or on expiry of a plan), the shares can be re-used for future offers to employees. The proposed employee share trust will broadly operate as follows: ● a trust to be known as the Company A Employee Share Trust ( EST ) will be settled with nominal trust property by Company A pursuant to the Company A Employee Share Trust Deed ( Deed ); ● the EST will be managed by an independent trustee, Company C ( Trustee ); ● future equity based incentive plans; ● the EST will be funded by Company A through irretrievable cash contributions paid into the EST by Company A or an appropriate subsidiary member of the Company A income tax consolidated group; ● in the case of the Plan, after exercise of any Options, or issue of Shares, the employee will be entitled to the dividends (if any), and to vote, on the Shares held on their behalf by the Trustee; and ● if the Trustee holds Shares which are not for Participants of the Plan or any future equity based incentive plans, then the Trustee in its discretion may: ● sell the Shares on the ASX; ● sell the Shares by private sale; or ● if Company A offers to buy back the Shares, accept the offer.

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 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 177D(2) | Income Tax Assessment Act 1936 subsection 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 section 83A-210 | Income Tax Assessment Act 1997 paragraph 83A-210(a)(i) | 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 subsection 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(b) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 and | Income Tax Assessment Act 1997 subsection 995-1(1).

Reasons for decision: Summary: The general deduction provision is section 8-1 which states: (1) 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. (1) 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. | Detailed Reasoning - Losses or outgoings: To claim a deduction under subsection 8-1(1) contributions made to the Trustee must be irretrievable and non-refundable. Pursuant to the Deed the Trustee must, on direction by the Board, acquire Shares to enable Company A to satisfy its obligations under the terms of the Plan. Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those Shares. The contributions made to the Trustee will be irretrievable and non-refundable to Company A in accordance with the Deed as all funds received by the Trustee from Company A will not be repaid to Company A. Under the Deed, upon termination of the EST the Trustee must distribute any Trust Assets (including Shares) to which no Participant is entitled at the time of termination. The Trustee must first proceed to pay all outstanding debts and liabilities of the EST. Any surplus that remains must then be distributed (after providing for any tax payable by the EST) to either another employees or any charity with deductible gift recipient status. The terms of the Deed when read together demonstrate that contributions made to the Trustee will be irretrievable and non-refundable and made only for the purposes of the Deed and therefore these contributions are considered to be a loss or outgoing for the purpose of subsection 8-1(1). | Detailed Reasoning - Sufficient nexus: In order for a loss or outgoing to be deductible under subsection 8-1(1) it must be either incurred in gaining or producing assessable income so as to satisfy paragraph 8-1(1)(a) or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income so as to satisfy paragraph 8-1(1)(b). Paragraph 8-1(1)(a) and paragraph 8-1(1)(b) are alternatives, in the event one paragraph is satisfied the other need not be considered. A line of authorities have 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 and Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). In general terms a sufficient nexus will exist between a loss or outgoing and the gaining or production of assessable income where the loss or outgoing is incidental and relevant to the income earning activities. The contributions made by Company A to the Trustee are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the Plan are designed to reward eligible employees for outstanding contributions to the business, drive financial results and support long term strategic objectives. The benefits provided to employees under the Plan are designed to attract talented staff, increase staff loyalty and reduce the staff turnover by encouraging share ownership thereby aligning the goals of employees with those of Company A shareholders. The benefits provided to Participants under the Plan are designed to improve the overall profitability of Company A. Company A has established the EST for the sole purpose of facilitating the Plan. A sufficient nexus exists between the irretrievable cash contributions made by Company A to the Trustee and the production of assessable income for the purposes of paragraph 8-1(1)(a). As paragraph 8-1(1)(a) is satisfied it is not necessary to consider paragraph 8-1(1)(b). Subsection 8-1(2) A loss or outgoing which may be deducted from the assessable income of a taxpayer because it satisfies subsection 8-1(1) may nevertheless be prevented from being deducted if any of paragraphs (a) to (d) are satisfied in subsection 8-1(2). | Detailed Reasoning - Capital or revenue: Paragraph 8-1(2)(a) operates to prevent a loss or outgoing that is capital or of a capital nature from being deductible. Company A will make irretrievable cash contributions from time to time to the Trustee as and when ordinary shares in Company A are to be subscribed for or acquired for Participants pursuant to the Plan. 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 it was determined that the payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or of a capital nature. The irretrievable cash contributions made to the Trustee acting as trustee of the EST are not capital or of a capital nature and will not satisfy paragraph 8-1(2)(a). Apportionment The combined operation of subsections 8-1(1) and 8-1(2) 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, for example, in the circumstances where contributions made to the Trustee for the purposes of administering the EST are used to subscribe for ordinary shares in Company A. 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 a contribution is, ultimately and in substance, applied by the trustee of an employee share trust 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 is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be 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 cash contributions made to the Trustee 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 any deduction would not need to be apportioned. Nothing in the facts suggest that the irretrievable cash contributions made to the Trustee as trustee of the EST are private or domestic in nature, are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the Income Tax Assessment Act 1936 (ITAA 1936). The irretrievable cash contributions made to the Trustee as trustee of the EST to fund the acquisition of ordinary shares in accordance with the Deed and Plan will be an allowable deduction to Company A under section 8-1. | Detailed Reasoning - Question 2: Company A will incur costs in relation to the establishment and implementation of the EST, including the costs that are associated with applying for this private ruling. Company A will also incur further costs associated with the services provided by the Trustee of the EST in respect of the on-going administration and management of the EST, including, but not limited to: ● costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants); ● 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 ● other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the Trust. In accordance with the Deed, the Trustee is not entitled to receive from the EST any remuneration in respect of its performance of its obligations as trustee of the EST. Company A may pay to the Trustee from its own resources any remuneration and reimburse any expenses incurred by the Trustee as Company A and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. The costs incurred by Company A in relation to the implementation and on-going administration of the EST are deductible under section 8-1 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 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 analysis 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). Further, nothing in the facts suggest that the costs are private or domestic in nature, 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. Accordingly, Company A is entitled to an income tax deduction, pursuant to section 8-1, 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 EST. | Detailed Reasoning - Question 3: 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. 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 interests. Arrangement The implementation of the Plan, establishment of the EST 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). ESS interest An ESS interest in a company is defined in subsection 83A-10(1) 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 Plan, each Option provided to a Participant when an offer is made under the Plan is an ESS interest 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) 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), subsection 995-1(1) defines the term 'scheme' as follows: (a) any arrangement; or (b) any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The Plan is an employee share scheme for the purposes of Division 83A 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 a Participant in relation to their employment in Company A in accordance with the Deed. A Share acquired by the Trustee to satisfy a right provided under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. Relevant connection The making of an offer under the Plan, the providing of Options under them, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and the allocation of Shares to Participants are all interrelated components of the Plan. 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. Accordingly, the provision of money to the Trustee to acquire Shares is for the purpose of enabling Participants, indirectly as part of the Plan, to acquire relevant rights (that is ESS interests). If Company A provides irretrievable contributions before a Participant acquires the relevant ESS interests, then section 83A-210 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1. In this instance, the contribution will only be deductible to Company A in the income year when the relevant Options (ESS interests) are provided to Participants. 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 . | Detailed Reasoning - Question 4: As discussed in the analysis above, section 83A-210 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 employee's employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Shares where the contribution is made after the acquisition of the relevant Options. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 in the income year in which the irretrievable contributions are made. | Detailed Reasoning - Question 5: Section 6-5 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was considered by Jordan CJ 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, where the trustee subscribes to the company for an issue of shares and pays the full subscription price for the shares, the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A is issuing 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 also of a capital nature. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when Company A receives subscription proceeds from the Trustee of the EST where the Trustee has subscribed for new shares in Company A to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and it will not be ordinary income under section 6-5. Section 20-20 Subsection 20-20(2) 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 for the subscription of shares by the Trustee of the EST. There is no insurance contract in this case, so the amount 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. Subsection 20-20(3) 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. Subsection 20-25(1) 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 that section 8-1 allows a deduction for bad debts or rates or taxes, section 20-30 will apply such that if there was a recoupment of that deduction, that amount would be assessable. The receipt by Company A is in return for issuing shares to the Trustee of the EST, not as a recoupment of previously deducted expenditure under section 8-1 regarding bad debts or rates and taxes that could be subject to section 20-30. The subscription proceeds will therefore not be an assessable recoupment under section 20-20. Capital Gains Tax (CGT) Under section 102-20, 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 are CGT event D1 (creating a contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) 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 happen if a company issues or allots equity interests or non-equity shares in the company. As Company A is issuing shares, being equity interests as defined in section 974-75, to the Trustee of the EST neither CGT event D1 nor CGT H2 will happen. Conclusion When the Trustee of the EST satisfies its obligations under the Deed by subscribing for new ordinary shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 or section 20-20 and will also not trigger a CGT event under Division 104. | Detailed Reasoning - Detailed reasoning: 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 (dominant purpose). The Commissioner has considered these three requirements and will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, the whole or a part of, any deduction claimed by Company A in respect of the irretrievable cash contributions Company A, or subsidiary member of the Company A income tax consolidated group, makes to the Trustee to fund the subscription for, or acquisition on-market of, Shares in accordance with the Plan and Deed. | Detailed Reasoning - Question 7: The liability of an employer to fringe benefits tax (FBT) arises under section 66 of the Fringe Benefits Tax Assessment Act 1986 (FBTAA) 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, 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 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. 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. 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); Subsection 995-1(1) states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4). Subsection 130-85(4) 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 (a) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Paragraphs 130-85(4)(a) and (b) The beneficial interest in a share received by a Participant when an ordinary share in Company A is provided to them under the terms of the Deed is an ESS interest within the meaning of subsection 83A-10(1). Subsection 83A-10(2) 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 Plan is an employee share scheme within the meaning of subsection 83A-10(2) 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 EST 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 Plan. 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) are therefore 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), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and Plan. Paragraph 130-85(4)(c) Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) will also require that the Trustee undertake incidental activities that are a function of managing the Plan. 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 merely incidental for the purposes of paragraph 130-85(4)(c): ● 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. 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 to be merely incidental. Under the Deed: The purpose of the Trust is to subscribe for, acquire and hold Shares and the Trust Assets for the benefit of Participants in accordance with this Deed. Paragraph 130-85(4)(c) is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the Plan. Conclusion The EST satisfies the definition of an employee share trust in subsection 130-85(4) as: ● the EST acquires shares in a company (being Company A); ● the EST ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2)) by allocating those shares to the employees in accordance with the Deed and Plan; and ● the Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the EST. Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA therefore excludes the contributions to the Trustee from being a fringe benefit. Accordingly, the 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, Shares will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 8: As mentioned in question 7, 'fringe benefit' is defined in subsection 136(1) of the FBTAA and 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. The provision of rights 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 Plan is an employee share scheme, that the rights provided under it are, or may later become in the case of indeterminate rights, ESS interests and that Subdivision 83A-B or 83A-C applies to those ESS interests. Accordingly, the provision of rights pursuant to the Plan will not be subject to fringe benefits tax either on the basis that they are acquired by Participants 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 or on the basis that they are a payment of salary or wages (in the case of 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 (refer to ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits). The provision of Shares As mentioned 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 and G Knowles and 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 its subsidiaries participates in the Plan, they obtain a right (being 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 (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). Therefore, the benefit that arises to an employee upon the exercise of a vested right under the Plan (being 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. | Detailed Reasoning - Question 9: 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. Notably, paragraphs 145 - 148 provide as follows: 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 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, 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 as irretrievable contributions to the EST, and to Participants as rights (Options) under the Plan (and the Shares received on their vesting) are excluded from the definition of a fringe benefit for the reasons given in questions 7 and 8 above. 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 by using the EST arrangement. As there would be no fringe benefits tax payable without the use of the EST (and nor likely would fringe benefits tax be payable under alternative remuneration plans), the fringe benefits tax liability is not any less than it would have been but for the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A, or any subsidiary member of the Company A income tax consolidated group, by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee of the EST to fund the subscription for, or acquisition on-market of, shares in Company A.

Reasons for decision: These reasons for decision accompany the Notice of private ruling Company A. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | NB All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Questions 1 to 6 - application of the single entity rule in section 701-1 | The consolidation provisions of the Income Tax Assessment Act 1997 (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 the subsidiary members of an income tax 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 that they are members of the income tax 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 of the SER the actions and transactions of the subsidiary members of the Company A income tax consolidated group are treated, for income tax purposes, as having been undertaken by Company A as the head company of the Company A income tax consolidated group. | The SER in section 701-1 has no application to the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). The Commissioner has therefore provided a ruling to Company A and each relevant company (which is a subsidiary member of the Company A income tax consolidated group) in relation to questions 7, 8 and 9.