Private ruling: Employee share scheme
Date of advice: 9 November 2017
Published: April 2018

Ruling: Q1: Will the entity be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for irretrievable cash contributions made by the entity (or a subsidiary member of the entity’s income tax consolidated group), to the Trustee of the entity’s employee share trust (the Trust) to fund the subscription for, or acquisition on-market of, the entity’s shares by the Trust? | A3: Yes. | Q2: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or in full, a deduction claimed by the entity for the irretrievable contributions made to fund the subscription for, or acquisition on-market of Shares by the Trustee, pursuant to the Plan? | A4: No. | Q3: Will the provision of performance rights to acquire Shares (Rights) or Shares to employees of the entity under the Plan be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefit Tax Assessment Act 1986 (FBTAA)? | A5: No. | Q4: Will the irretrievable cash contributions made by the entity to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan be a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A6: No.


Relevant legislative provisions: 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) | 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)(f) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | 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 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 paragraph 83A-10(2)(a) | Income Tax Assessment Act 1997 paragraph 83A-10(2)(b) | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 subsection 83A-210(a) | Income Tax Assessment Act 1997 paragraph 83A-210(a)(i) | Income Tax Assessment Act 1997 paragraph 83A-210(a)(ii) | Income Tax Assessment Act 1997 subsection 83A-210(b) | 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 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Act 1997 paragraph 995-1(1)(a) | Income Tax Assessment Act 1997 paragraph 995-1(1)(b)

Reasons for decision: Summary: All legislative references in this Ruling are to the Income Tax Assessment Act 1997 ( ITAA 1997), unless otherwise indicated. | Detailed Reasoning - Questions 1, 2a, 2b and 3: The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as single entities for income tax purposes. Under the single entity rule (SER) in section 701-1 the subsidiary members of a consolidated group are taken to be parts of the head company. As a consequence, for income tax purposes, subsidiary members cease to be recognised as separate entities during the period they are members of a consolidated group and the head company of the group is the only entity recognised. 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 (TR 2004/11) . As a consequence, the actions and transactions of the subsidiary members of the entity’s tax consolidated group are treated for income tax purposes as having been undertaken by the entity as the Australian head company of the entity’s tax consolidated group. | Detailed Reasoning - Questions 4 and 5: The SER in section 701-1 has no application to the FBTAA. Accordingly, the Commissioner has provided a ruling to the entity and each employer of the entity’s Group, in relation to questions 4 and 5. | Summary: The entity, as head of an income tax consolidated group, will be eligible to deduct an amount pursuit to section 8-1, in respect of the irretrievable cash contributions made by it to the trustee of the Trust to fund the subscription for or acquisition on-market of Shares. | Detailed Reasoning - Detailed reasoning: The general deduction provision in section 8-1 states: | Detailed Reasoning - 8-1(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. | Detailed Reasoning - 8-1(2): 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 - Employee remuneration trusts: Draft Taxation Ruling TR 2017/D5 Income tax: employee remuneration trusts (TR 2017/D5) provides the Commissioner’s current view on a broad scope of taxation consequences for employers, trustees and employees who participate in an employee remuneration trust (ERT) arrangement. It explains how the taxation laws apply when a contribution is made by an employer to the trustee of an ERT and benefits are paid or provided by the trustee of the ERT to employees. TR 2017/D5 applies to employers, their employees and trustees who participate in an ERT as described at paragraphs 7 and 8 of TR 2017/D5. On the facts, the way in which the Trust has been established and operates is consistent with the essential elements of an ERT as set out in paragraphs 7 and 8 of TR 2017/D5. Accordingly, an employer is entitled to a deduction under section 8-1 for a contribution paid to the trustee of an ERT that is either: ● incurred in gaining or producing assessable income (‘first limb’) or ● necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (‘second limb’) to the extent the contribution is not private or domestic in nature, is not capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936. | Detailed Reasoning - The contribution must be incurred: To qualify for a deduction under section 8-1, a contribution to the trustee of an ERT trust must be incurred. As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of ‘incurred’ – timing of deductions (TR 97/7) and Taxation Ruling TR 94/26 Income tax: subsection 51(1) – meaning of incurred – implications of the High Court decision in Coles Myer Finance (TR 94/26). Paragraph 76 of TR 2017/D5 states that a contribution made to the trustee of an ERT is incurred only when the ownership of that contribution passes from an employer to the trustee of the trust and there is no circumstances in which the employer can retrieve any of the contribution – Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 (Spotlight). Pursuant to the Trust Deed, all funds received by the Trustee from the entity will constitute accretions to the corpus of the Trust and will not be repaid to the entity (other than when the Trustee subscribes for Shares (3.6(b)) and no Participant shall be entitled to receive such funds. Under the Trust Deed, upon termination of the Trust, the Trustee will sell any Shares as directed by the entity (but not for the benefit of the entity). Accordingly, the contributions made by the Trust will be irretrievable and non-refundable to the entity. Therefore, it is considered that the irretrievable contributions made by the entity to the Trustee of the Trust will be incurred for the purposes of subsection 8-1(1). | Detailed Reasoning - The contribution must be incurred in gaining or producing assessable income or necessarily incurred in carrying on a relevant business: Further, to be deductible under section 8-1, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. In order to satisfy the second limb of section 8-1, there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is ‘desirable or appropriate in the pursuit of the business ends of the business’ ( Ronpibon Tin NL and Tongkah Compound NL v. FC of T (1949) 78 CLR 47 ; Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (1980) FCA 150). Paragraph 9 of TR 2017/D5 provides that a contribution is deductible to the employer under section 8-1 where all the following applies: ● it is an irrevocable payment of cash, made at a time when the employer carries on a business for the purpose of gaining or producing assessable income ● the employer reasonably expects their business to benefit from their contribution via an improvement in employee performance, morale, efficiency or loyalty, and ● the contribution is intended to be permanently and entirely dissipated in remunerating employees of that business within a relatively short period of the contribution being made (other than employees who are wholly engaged in affairs of capital of the business). If an employer meets the criteria set out in Paragraph 9 of TR 2017/D5, a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business. The entity and its subsidiaries comprise a group that is focused on the attraction, motivation and retention of key employees in the Group. As part of this strategy, the entity operates a Plan under which eligible participants are granted Rights to acquire ordinary Shares in the entity. On the facts, the entity will make contributions to the Trustee of the Trust for the primary purpose of enabling the Trustee to acquire Shares which will, in accordance with the Trust Deed, be allocated to and held for Participants upon granting of the Share Rights. Further, Paragraph 82 of TR 2017/D5 states that a contribution will be deductible under section 8-1 when, and to the extent that, within a relatively short period of the contribution being made, the contribution held in trust is intended to be permanently and entirely dissipated in providing remuneration to employees. Paragraph 83 of TR 2017/D5 states that: A ‘relatively short period’ is less than five years from the date the contribution was made by an employer to the trustee. Where a contribution is intended to be retained within the ERT for a longer period, it is questionable whether the contribution serves appropriate business-related needs of the employer and whether any advantages obtained from the contribution are revenue in nature. Pursuant to the Trust Deed and the Plan, the purpose of the contributions made by the entity to the Trustee is to be applied to the direct remuneration of Participants in the form of Shares as and when employees become entitled. Accordingly, the irretrievable contributions made by the entity to the Trustee of the Trust for remunerating its employees under the Plan is an outgoing incurred in carrying on its business for the purpose of gaining or producing assessable income. | Detailed Reasoning - The contribution must not be capital or of a capital nature: Even where a contribution satisfies either limb of subsection 8-1(1), it may still be capital or of a capital nature. Pursuant to subsection 8-1(2), the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature (paragraph 85 of TR 2017/D5). Paragraph 86 of TR 2017/D5 states that the nature of an outgoing as either capital or revenue can generally be determined by examining the character of the advantage sought, the manner in which it is to be used, relied upon or enjoyed and the means adopted to obtain it. A contribution to the trustee of an ERT is of capital or of a capital nature, where the contribution secures for an 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: paragraph 87 of TR 2017/D5. On weighting up the facts in this case we consider: ● the contributions by the entity to the Trust are for the purpose of acquiring Shares to meet the entity’s commitments arising under the Plan. They are primarily outgoings incurred in the ordinary course of carrying on its business ● the contributions will be applied within a relatively short period of time to acquire Shares for the benefit of Participants after the Vesting Conditions are satisfied ● the amount of the contribution provided by the entity is sufficient for the Trustee to acquire the requisite number of Shares under the terms of the Trust Deed ● Participants will receive absolute entitlement to Shares upon the exercise of Share Rights within the relevant Vesting Periods, and ● the Plan provides Participants with an opportunity to receive an equity interest in the entity because the Vesting Conditions are linked to performance and retention of Participants. Therefore, the contributions made by the entity are not considered capital in nature. Accordingly, the irretrievable cash contributions made by the entity to the Trustee of the Trust to fund the acquisition of Shares will be an allowable deduction to the entity under section 8-1. | Summary: Section 83A-210 will apply and the contribution will only be deductible in the year of income when the relevant ESS interests are subsequently granted and the expenditure incurred. | Detailed Reasoning - Detailed reasoning: The deduction for the irretrievable cash contributions under section 8-1 would generally be allowable in the income year in which the entity incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210. Section 83A-210 provides that if: (a) at a particular time, you provide another entity with money or other property: (i) under an *arrangement; and (ii) for the purpose of enabling an individual (the ultimate beneficiary ) to acquire, directly or indirectly, an *ESS interest under an *employee share scheme in relation to the ultimate beneficiary’s employment (including past or prospective employment); and (b) that particular time occurs before the time (the acquisition time ) the ultimate beneficiary acquires the *ESS interest; then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time. Section 83A-210 will only apply if there is a relevant connection between the irretrievable cash contribution (the money) provided to the trustee for the purpose of enabling an employee to acquire (directly or indirectly) an ESS interest under an ESS; and the contributions are made before the income year in which the employee acquires the ESS interest. | Detailed Reasoning - Arrangement: The implementation of the Plan, the establishment of the Trust under the Trust Deed and the provisions of money by the entity to the Trustee to acquire and hold Shares on behalf of Participants, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i). | Detailed Reasoning - 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 Right or Share provided to a Participant when an offer is made under the Plan Rules is an ESS interest, as it is a beneficial interest in a share or a right to acquire a beneficial interest in a share in the entity. | Detailed Reasoning - 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 ESS for the purposes of subsection 83A-10(2) as it is an arrangement under which an ESS interest (a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in the entity, in accordance with the Trust Deed. | Detailed Reasoning - Relevant connection: The granting of Rights, 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. In particular, the provision of money to the Trustee is a necessary component for the scheme to operate. Accordingly, this is for the purpose of enabling Participants to acquire ESS interests. This is consistent with the ATO view expressed in ATO ID 2010/103 Income tax – Employee share scheme: timing of deduction from money provided to the trustee of an employee share trust (ATO ID 2010/103). However, in circumstances where an amount of money is used by the Trustee to purchase excess shares, or where the money is held in the Trust, and intended to meet obligations arising from a future grant of ESS interests, the payment occurs before the employees acquire the relevant ESS interests. In such circumstances, section 83A-210 will apply and the contribution will only be deductible in the year of income when the relevant ESS interests are subsequently granted and the expenditure incurred. This is consistent with the ATO view expressed in ATO ID 2010/103. | Summary: If irretrievable contributions by the entity to the Trustee are made after the acquisition of the relevant ESS interests, the entity is eligible for a deduction in the year in which the money was paid to the Trustee. | Detailed Reasoning - Detailed reasoning: As stated in answer to the previous question (2a), the granting of Rights, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the Shares by the Trustee and their allocation 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, section 83A-210 will not apply where the entity makes irretrievable contributions to the Trustee to fund the acquisition of Shares, where the contribution is made after the acquisition of the relevant ESS interests. In such a situation, the irretrievable contributions by the entity to the Trustee will be deductible pursuant to section 8-1, in the income year in which the irretrievable contributions are made and relevant rights are ultimately satisfied with Shares. | Summary: The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit or imputation benefit in connection with an arrangement. If Part IVA applies the tax benefit or imputation benefit can be cancelled, for example, by disallowing a deduction that is otherwise allowable. 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: ● there must be a scheme within the meaning of section 177A of the ITAA 1936 ● 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 ● having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies. On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the entity for the irretrievable cash contributions made to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, Shares by the Trust. | Summary: The provision of Rights or Shares by the entity to its employees under the Plan will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: The liability of an employer 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. 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. | Detailed Reasoning - The provision of rights: Certain benefits however are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition in subsection 136(1) of the FBTAA. 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' states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee scheme (within the meaning of the Income Tax Assessment Act 1997 ) to which Subdivision 83AB or 83AC of that Act applies. An ‘ESS interest’ in a company is defined in subsection 83A-10(1) as a beneficial interest in either: (a) a share in the company; or (b) a right to acquire a beneficial interest in a share in the company. Subsection 83A-10(2) states: An employee share scheme is a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) of: (a) the company, or (b) *subsidiaries of the company. This exclusion from the definition of ‘fringe benefit’ applies to ESS interests acquired on or after 1 July 2009. | Detailed Reasoning - Rights and Shares: Under the terms of the Plan, Participants are granted Rights over fully paid Shares. The Rights are ESS interests and acquired at a discount pursuant to subsection 83A-10(1). Accordingly, the Commissioner accepts that the Plan is an ESS and it follows that the provision of a Right will not be subject to FBT. Furthermore, when an employee of the entity participates in the Plan, they obtain a Right (to acquire a beneficial interest in a Share) that 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 the employment. (This is consistent with the conclusion in 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 (ATO ID 2010/219). Accordingly, the benefit gained by an employee upon the exercise of a vested Right under the Plan (being the provision of a Share) will not give rise to a ‘fringe benefit’, as defined in subsection 136(1) of the FBTAA, because a benefit has not been provided ‘in respect of’ the employee’s employment relationship. | Summary: The irretrievable cash contributions will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); or … . In turn, 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 (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Based on the facts provided, paragraphs 130-85(4)(a) and (b) are satisfied because: ● the Trust acquires shares in a company, namely the entity, and ● the Trust ensures that ESS interests (as defined in subsection 83A-10(1), being beneficial interests in the Shares), 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 Trust Deed and Plan. | Detailed Reasoning - Paragraph 130-85(4)(c): 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 an employee share trust. Such incidental activities will not cause a trust to fall outside the definition of ‘employee share trust’ for the purposes of subsection 130-85(4), as is clearly indicated in paragraph 130-85(4)(c). 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 (ATO ID 210/108) sets out a number of activities that are ‘merely incidental’ for the purposes of paragraph 130-85(4)(c). In regard to the entity’s ESS, the activities that the Trustee is permitted to undertake according to the Trust Deed (in particular, the Trustee’s general powers) are merely incidental to the primary purposes of an employee share trust, as stated in paragraphs 130-85(4)(a) and 130-85(4)(b). This is consistent with the Trust Deed, which provides that the Trust will be managed and administered so that it satisfies the definition of ‘employee share trust’. Provided that the Trustee administers the Trust according to the terms of the Trust Deed, the activities of the Trustee will satisfy the sole activities test in subsection 130-85(4). Accordingly, the Trust will be an employee share trust. | Detailed Reasoning - Conclusion: Paragraph (ha) of the definition of ‘fringe benefit’ in subsection 136(1) of the FBTAA excludes the irretrievable cash contributions to the Trustee from being fringe benefits. It follows that the irretrievable cash contributions made by the entity (or a subsidiary member of the Group) to the Trustee to fund the subscription for, or acquisition on-market of, Shares pursuant to the Plan will not constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA.

Will the irretrievable cash contributions made by the entity to the Trustee to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests be deductible to the entity 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? | Question 2b: Will the irretrievable contributions made by the entity to the Trustee, to fund the subscription for, or acquisition on-market of, Shares to satisfy ESS interests be deductible to the entity 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? | Company background: The entity and its subsidiaries comprise a tax consolidated group (the Group). | The entity is focused on the attraction, motivation and retention of key employees in the Group. As part of this strategy, it operates a performance rights plan (the Plan) under which eligible participants are granted Rights to acquire ordinary Shares in the entity, under the terms of the Plan. | All participants in the Plan are referred to as ‘employees’. | Under the Plan, Rights are awarded to participants at no cost and give participants the right to receive Shares at no cost, subject to meeting performance hurdles, which to date have been based on the entity’s earnings per share and relative total shareholder return, as determined by the entity’s Board (the Board) over a three-year period (the Performance Period). | The entity established an employee share trust (the Trust) under a deed to allow the Trust to operate for the purpose of acquiring and holding shares for the benefit of participants, in accordance with the rules of any employee or executive incentive plan adopted or operated by the entity. | The Trust Deed allows the Trustee, from time to time, to acquire, hold, and allocate Shares to employees participating in equity plans operated by the entity. | The Trust was established to provide for the delivery of Shares to employees with the sole activities of the Trust being obtaining Shares (or Rights) and providing those Shares (or Rights) to the employees. | The private binding ruling was sought only in respect of contributions made to the Trust to satisfy awards relating to Australian-based participants. | All references to assessable income or allowable deductions refer to assessable income or allowable deductions of the entity, as the head company of the Group. | Under the Plan, participants are granted Rights which vest subject to achievement of the Group performance hurdles. | Where a participant’s employment with the Group is terminated prior to the end of the three-year performance period, Rights held by the participant will generally lapse. | Cessation of employment in special circumstances (e.g. redundancy, retirements and total and permanent disablement) will generally result in the continued holding of some or all of the unvested Rights by, or on behalf of, the participant, subject to the Plan Rules. | Grant of Rights: The Plan allows the entity to offer Rights to employees. The terms of each grant are set out in the relevant invitation letter to participants, and are to be considered with reference to the Plan Rules. | A Right is an entitlement to acquire, at no cost, a Share, subject to satisfaction of the vesting conditions, granted to a participant under the Plan on the terms and conditions determined by the Board. | Rights do not carry dividend or voting rights. Where the vesting conditions of the particular Rights are satisfied at the end of the vesting period, Shares are allocated to the participant. | Upon receiving an offer to participate in the Plan, the employee automatically becomes a participant unless the employee submits a rejection form, rejecting the offer of Rights. | Lapse of Rights: Unless otherwise determined by the Board, Rights will lapse if: | ● vesting conditions have not been satisfied within the relevant performance period; | ● the Participant ceases employment with the Group prior to the end of the relevant performance period, unless the Board determines, or Plan Rules specify, otherwise; | ● the Participant deals with the Rights in a way not permitted by the Plan Rules; or | ● the Board applies the clawback provision in the Plan Rules, e.g., where a Participant acts fraudulently or dishonestly. | Vesting of Rights: As soon as practical after vesting, the entity must allocate the number of Shares in respect of which Rights have vested. | Outstanding Rights: The entity will make contributions to the Trust to acquire Shares for the purpose of settling vested Rights. | The entity established the Trust to facilitate the acquisition, holding of, and allocation of Shares to participants in accordance with employee or executive incentive plans (including the Plan), that the entity adopts or operates from time to time. | The Trust is an independent legal entity and is not part of the entity’s group. The Trust Deed precludes the entity from being a beneficiary of the Trust and receiving any income or capital from the Trust. | Reasons for the establishment and use of the Trust include: | ● the acquisition and holding of Shares to fulfil obligations under the Plan | ● an arm’s length vehicle for acquiring and holding Shares in the entity, either by way of new issue or acquisitions on market; i.e., providing flexibility relating to capital management | ● being an efficient structure for giving effect to vesting conditions and trading restrictions (as the Trustee of the Trust is the legal owner, employees have no ability to deal in the Shares) | ● contributing to the Trust to acquire Shares before Rights vest may enable the entity to hedge against a potential increase in costs to satisfy Rights due to share price growth, as well as the potential for insufficient Shares being available on-market immediately prior to vesting | ● the Trust provides the flexibility to acquire and hold Shares that will be allocated to employees under the Plan. When vesting conditions are not met, awards granted under the Plan are forfeited and the Trust enables Shares held for such forfeited awards to be ‘recycled’ to satisfy other grants, and | ● the Trust establishes independent records and accounts for participating employees. | Obligations of the Trustee: The sole activities of the Trustee will be acquiring Shares for the purpose of providing them to participants on vesting of their awards under the Plan and the administration of the Trust. The Trustee will acquire Shares at market value and will either acquire them on-market or subscribe for new Shares. The Trust is managed and administrated so that it satisfies the definition of an ‘employee share trust’ for the purpose of subsection 130-85(4) of the ITAA 1997. | All funds received by the Trustee from the entity will constitute accretions to the corpus of the Trust and no participant will be entitled to receive a distribution of or from such funds. | The entity is not a beneficiary under the Trust Deed and any funds it contributes to the Trust cannot be repaid or returned to the Taxpayer or any other member of the Group other than by way of the Trustee paying the issue price where it subscribes for Shares in the entity (i.e., the contributions will be irretrievable). In addition, the Taxpayer (or any other member of the Group) will have no interest in the Shares held by the Trust (the Trust Deed). | In determining whether to request the Trustee to subscribe for or purchase Shares on-market, matters the Board will take into account include: | ● the Group’s current capital management strategy | ● the dilution impact any issue of new Shares will have | ● the liquidity (trade volume) of the Group’s Shares | ● the extent to which Rights granted to the Chief Executive Officer and Managing Director (CEO), which may be satisfied by the Shares to be acquired, have been approved by the Group’s shareholders (where Rights granted to the CEO are satisfied with Shares acquired on-market, shareholder approval may not be required) | ● the Board’s expectations regarding the price movements of the Shares and their volatility over the short and longer term, and | ● trading restrictions or anticipated activity of the Shares. | The Trustee will, in accordance with instructions received and pursuant to the Plan Rules, acquire, hold and allocate Shares to participants provided that the Trustee receives sufficient payment from the entity to subscribe for or purchase Shares and/or has sufficient unallocated Shares available in the Trust. | Shares will not be allocated to participants and no interest in the Shares will arise until the relevant vesting conditions are met and Rights have vested. | The entity may make irretrievable contributions to the Trust as required. In determining the amount of funds to be contributed to the Trust at any point in time, matters the Board may take into account include: | ● the number of Rights granted to employees under the Plan | ● the number of Shares held by the Trust at the relevant time | ● the number of outstanding Rights, their time horizons (i.e., when they are likely to vest and be exercised) and anticipated level of vesting to allow the Group to estimate the number and timing of Shares required to satisfy Rights | ● the Board’s expectations regarding the Group’s Share price performance and volatility over the short and longer term | ● any anticipated corporate activity that may prompt a trading ‘black out’ period, and | ● the entity’s cash flow position. | Operation of the Trust: The Trustee will not be permitted to do the following: | ● acquire any Share or allocate any Share to any participant, if to do so would contravene applicable law | ● carry out activities that are not matters or things which are necessary or expedient to administer and maintain the Trust in accordance with the Plan Rules, and | ● carry out activities which result in the participants being provided with additional benefits other than the benefits that arise under the Plan Rules. | With respect to the Plan, the Trust Deed specifies that the Trustee must acquire, hold and allocate Shares for the benefit of Participants under the Plan in accordance with instructions from the entity. | The Trustee is only required to satisfy Rights with Shares held by the Trust to the extent that sufficient payment has been received to buy Shares on market, and/or to the extent that sufficient Shares are already held in Trust. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for the entity.