Private ruling: Employee Share Scheme
Published: August 2011
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: The year ended 30 June 2012.

Ruling: Q1: Will A Co obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the non-refundable cash contributions made by A Co to the Trustees of the Employee Share Trust (EST) to fund the subscription for or acquisition on-market of A Co shares by the EST? | A1: Yes. | Q2: Will A Co obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997 in respect of costs incurred in relation to the implementation and on-going administration of the EST? | A2: Yes. | Q3: Are non-refundable cash contributions made by A Co to the Trustee of the EST, to fund the subscription for or acquisition on-market of A Co shares by the EST, deductible to A Co at a time determined by section 83A-210 of the ITAA 1997 in respect of the Employee Share Scheme (ESS) interests that have a deferred taxing point arising after on or after 1 July 2009? | A3: Yes. | Q4: Are non-refundable cash contributions made by A Co to the Trustee of the EST, to fund the subscription for or acquisition on-market of A Co shares by the EST, deductible to A Co at a time determined by former section 139DB of the ITAA 1936 in respect of the ESS interests that have a deferred taxing point arising before 1 July 2009? | A4: Yes. | Q5: If the EST satisfies its obligations under the ESS by subscribing for new shares in A Co, will the subscription proceeds be included in the assessable income of A Co under section 6-5 or section 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 ITAA 1936 applies to deny in part or in full, any deduction claimed by A Co in respect of the irretrievable cash contributions made by A Co to the Trustee of the EST to fund the subscription for or acquisition on-market of A Co's shares by the EST? | A6: No.

Relevant facts and circumstances: 1. A Co is proposing to amend its current ESS to include an Employee Share Trust (EST) as part of its overall remuneration strategy for its employees. The current ESS 1. The purpose of the ESS is to provide eligible employees with an opportunity to potentially acquire shares in A Co to encourage a long-term view of performance, and to assist with the recruitment, reward and retention of employees. 2. The ESS, allows A Co discretion to invite employees to participate in the ESS by offering them options. 3. Exercise of the option is only valid when A Co receives the full value for the full amount of the exercise price in cleared funds. 4. Once exercise of an option becomes effective, A Co has a limited amount of time to allot and issue the shares that are subject of the option to the employee. 5. These shares are fully paid ordinary shares. 6. Under the current ESS, the employee will hold the share. The proposed changes to the ESS to facilitate the EST 7. A Co is proposing to amend its ESS to facilitate the establishment of an EST to hold the shares on behalf of the employees. EST 8. The EST is established solely for the purpose of obtaining shares in A Co for the benefit of employees pursuant to the proposed ESS. 9. A Co will fund the EST in accordance with the EST Trust Deed. 10. These funds will be used to acquire shares in A Co. 11. A Co will fund the EST on an ongoing basis as the need for funds arise. 12. The Trustee of the EST will be B Co, an external trustee acting in an independent capacity on behalf of the employee beneficiaries. Operation under the proposed changes 13. Under the proposed changes, legal title of the share will be held by the EST. 14. Shares acquired by the Trustee will be immediately allocated to the relevant employees and held on their behalf. 15. A Co will incur costs in relation to the implementation and on-going administration of the EST.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5, | Income Tax Assessment Act 1997 Section 8-1, | Income Tax Assessment Act 1997 Section 20-20, | Income Tax Assessment Act 1997 Division 83A, | Income Tax Assessment Act 1997 Section 83A-210, | Income Tax Assessment Act 1997 Division 104, | Income Tax Assessment Act 1997 Section 104-35, | Income Tax Assessment Act 1997 Section 104-155, | Income Tax Assessment Act 1936 former Division 13A, | Income Tax Assessment Act 1936 former subsection 139C(4), | Income Tax Assessment Act 1936 former section 139DB, | Income Tax Assessment Act 1936 Part IVA, | Income Tax (Transitional Provisions) Act 1997 section 83A-5 and | Income Tax (Transitional Provisions) Act 1997 section 83A-10.

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under section 8-1 to the extent that it is a loss or outgoing of capital or of a capital nature, private or domestic nature, incurred in relation to gaining or producing exempt income or non-assessable-non-exempt income, or another provision in the Act prevents you from deducting it. In order for the non-refundable cash contributions made by A Co to the Trustee of the EST to be deductible under subsection 8-1(1) of the ITAA 1997, it must be 'incurred' in 'gaining or producing' A Co's 'assessable income'. These terms are considered below. 'Incurred' in the relevant year of income There is no statutory definition of the term 'incurred', however, guidance is provided in Taxation Ruling TR 94/26 (TR 94/26). For an outgoing to be 'incurred', TR 94/26 considers that a presently existing pecuniary liability at the end of the relevant income year is sufficient to satisfy this requirement. However, it is not sufficient that the liability to pay is pending, threatened or expected. Whether there is a presently existing pecuniary liability is a question which must be determined in light of the particular facts of each case, and especially by reference to the terms of the contract or arrangement under which the liability is said to arise. Referable to the relevant income year In some circumstances, it may not be enough that a loss or outgoing has been incurred for the purposes of section 8-1 of the ITAA 1997. The outgoing must also be properly referable to the year of income in which the deduction is sought. However, TR 94/26 provides that it is not necessary to have regard to the period to which an expense is properly referable where the liability comes into existence and is discharged in the same year. In the present case the timing of deductions, as discussed in questions 3 and 4 below, will be determined by either former section 139DB of the Income Tax Assessment Act 1936 (ITAA 1936) or section 83A-210 of the ITAA 1997. In gaining or producing assessable income The words 'in gaining or producing' were considered in Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 (Ronpibon): The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income…In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income…The question is how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income. Thus, there needs to be a sufficient nexus between the expenditure and the production of assessable income. Further guidance is provided in Taxation Ruling TR 95/33 (TR 95/33) which refers to the decision in Fletcher v. Federal Commissioner of Taxation (1991) 173 CLR 1: The question whether an outgoing was, for the purposes of s. 51(1), wholly or partly "incurred in gaining or producing the assessable income" is a question of characterisation. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character or an outgoing of the relevant kind. The essential character of an expense is a question of fact to be determined by reference to all the circumstances. TR 95/33 further provides that it will not generally be necessary to have regard to the taxpayer's subjective purpose, motive or intention, where, in having regard to the overall objective circumstances there is an obvious commercial connection between the loss or outgoing and the income producing activities of the taxpayer. Further, the two positive limbs contained in paragraphs 8-1(1)(a) and (b) of the ITAA 1997 are alternative tests. It is sufficient for either one of the limbs to be satisfied. Also, the words 'in gaining or producing' "have a very wide operation and will cover almost all the ground occupied by the alternative" ( Ronpibon ) test contained in paragraph 8-1(1)(b) of the ITAA 1997. The purpose of the ESS is to provide a benefit to the employee or an associate of the employee by allowing them to obtain a share or right in A Co at a discount, being part of the overall remuneration costs of the employer. It is part of A Co's remuneration strategy. (Unless otherwise stated reference to the ESS in the reasons for decision includes the current ESS and the proposed ESS). Under the proposed ESS, A Co will contribute funds to the EST so that the EST can provide benefits to the employees in the form of shares when the employees exercise the options that they have been granted. The EST will then subscribe for or acquire shares of A Co to hold on behalf of the employees. There is a clear connection between the irretrievable and non-refundable contributions of money made to the Trustee of the employee share scheme under the proposed ESS and the positive limbs of section 8-1 of the ITAA 1997. That is, the irretrievable contributions of money made by A Co to the EST are a part of remuneration costs of A Co. Therefore it is an outgoing incurred in gaining or producing A Co's assessable income. The negative limbs in subsection 8-1(2) of the ITAA 1997 will now be considered. | Detailed Reasoning - The negative limbs: A loss or outgoing will not be deductible to the extent that it satisfies one of the negative limbs contained in subsection 8-1(2) of the ITAA 1997. Subsection 8-1(2) of the ITAA 1997 relevantly provides as follows: 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. The distinction between revenue and capital is assisted by a considerable amount of case law. In Macquarie Finance Ltd. v. Federal Commissioner of Taxation (2005) 146 FCR 77, the Court recognised the three tests as set out in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 CLR 337 (Sun Newspapers) as the classic exposition of capital: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or by making a final provision or payment so as to secure future use or enjoyment. In the present case, the fundamental issue is whether the non-refundable cash contributions made by A Co to the trustee of the EST are a loss or outgoing of capital or of a capital nature. To the extent that these contributions are of capital or of a capital nature, they will not be an allowable deduction under paragraph 8-1(2)(a) of the ITAA 1997. Based on the facts provided, the advantage that is sought by A Co in incurring the non-refundable cash contributions to the Trustee of the EST is to provide employees with an opportunity to share in the growth of A Co, to encourage a long-term view of performance, and to assist with recruitment, reward and retention of employees. The ESS is part of A Co's employee remuneration strategy. As discussed above, under the proposed ESS, A Co will contribute funds to the EST so that the EST can provide benefits to eligible employees. This benefit is provided in the form of shares when the employee exercises their options granted under the ESS. The cash contributions are irretrievable and non-refundable. The benefit provided to the employee or an associate of the employee, by allowing them to obtain a share or right in A Co at a discount, is a part of the overall remuneration costs of the employer. Nothing in the facts suggest that the contributions are private or domestic in nature, or are incurred in gaining or producing exempt income, or are otherwise prevented from being deductible under a specific provision of the ITAA 1997 or the ITAA 1936. Based on the facts provided the negative limbs of section 8-1 of the ITAA are not satisfied. Therefore, the non-refundable cash contributions made by A Co to the Trustees of the EST to fund the subscription for or acquisition on-market of A Co shares by the EST will be deductible under section 8-1 of the ITAA 1997. In reaching this decision consideration was given to ATO Interpretative Decision ATO ID 2002/1074 Income Tax - deductibility - irretrievable employer contributions paid to the trustee of its employee share scheme to acquire a share or right under the employee share scheme . | Detailed Reasoning - Question 2: As discussed in question 1 above, section 8-1 of the ITAA 1997 states that you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income (the positive limbs). However, you cannot deduct a loss or outgoing under section 8-1 to the extent that it is a loss or outgoing of capital or a capital nature, private or domestic nature, incurred in relation to gaining or producing exempt income or non-assessable-non-exempt income, or another provision in the Act prevents you from deducting it (negative limbs). A Co will incur costs in relation to the implementation and on-going administration of the EST. The EST is established for the sole purpose of obtaining shares for the benefit of employees of A Co pursuant to the ESS. Reference is made to the discussion on section 8-1 of the ITAA 1997 on question 1 above, and based on the facts provided, the costs incurred by A Co in implementing and administering the EST are deductible under section 8-1 of the ITAA 1997. This is because the operating costs associated with the administration and implementation of the ESS is part of the ordinary employee remuneration costs of A Co. There is a clear connection between the costs incurred in implementing and administering the EST and the positive limbs of section 8-1 of the ITAA 1997. That is, it is an outgoing incurred in gaining or producing A Co's assessable income. Further, the negative limbs of section 8-1 are not satisfied. Therefore, the costs incurred by A Co in relation to the implementation and on-going administration of the EST will be deductible to A Co under section 8-1 of the ITAA 1997. In reaching this decision consideration was given to ATO Interpretative Decision ATO ID 2002/961 Income Tax - employer costs for the purpose of administering its employee share scheme are deductible . | Detailed Reasoning - Question 3: Options issued on or after 1 July 2009 are subject to Division 83A of the ITAA 1997. However, in the present case the applicant has advised that there are Options which were issued prior to 1 July 2009, where the deferred taxing point arises on or after 1 July 2009. In this case it is necessary to consider the operation of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) to determine the timing of the deduction under section 8-1 of the ITAA 1997. Importantly, consideration of the ITTPA 1997 will determine whether Division 83A of the ITAA 1997 will apply (section 83A-210 of the ITAA 1997) or former Division 13A of the ITAA 1936 (former section 139DB of the 1936) will apply to the ESS interest. Broadly, subsection 83A-5(1) of the ITTPA 1997 states that Division 83A of the ITAA 1997 applies in relation to an ESS interest if the interest was acquired on or after 1 July 2009 and the relevant share or right was not acquired before 1 July 2009. Further, subsection 83A-5(2) of the ITTPA 1997 states that: Furthermore, Subdivision 83A-C of the Income Tax Assessment Act 1997 (and the rest of Division 83A of that Act, to the extent that it relates to that Subdivision) also applies in relation to an ESS interest if: (a) all of the following subparagraphs apply: (i) at the pre-Division 83A time, subsection 139B(3) of the Income Tax Assessment Act 1936 applied in relation to the interest; (ii) the interest was acquired (within the meaning of former Division 13A) before 1 July 2009; (iii) the cessation time mentioned in subsection 139B(3) of the Income Tax Assessment Act 1936 , as in force at the pre-Division 83A time, for the interest did not occur before 1 July 2009; or (a) all of the following subparagraphs apply: (i) at the pre-Division 83A time, section 26AAC of the Income Tax Assessment Act 1936 , as in force at that time, (former section 26AAC) applied in relation to the interest; (ii) the interest was acquired (within the meaning of former section 26AAC) before 1 July 2009; (iii) an amount has not been included in a person's assessable income under former section 26AAC in relation to the interest before 1 July 2009. An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 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. An option granted to an employee under the scheme will be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the option to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme. Options issued to eligible employees pursuant to the ESS prior to 1 July 2009 will satisfy the section 83A-5(2) of the ITTPA 1997 where an election has not been made by the participant pursuant to former section 139E of the ITAA 1936 and where the cessation time mentioned in former subsection 139B(3) of the ITAA 1936 has not occurred prior to 1 July 2009. Accordingly Division 83A will have application and section 83A-210 will determine the timing of the deduction for an ESS interest subject to Division 83A. Section 83A-210 of the ITAA 1997 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 (a) 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 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an employee share scheme in relation to the employee's employment. The granting of the beneficial interests in the options, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the trustee necessarily allows the scheme to proceed. Consequently, the provision of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the options. A deduction for the purchase of shares to satisfy the obligation arising from the grant of options is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997. Therefore, the timing of the deduction under section 8-1 of the ITAA 1997 for the non-refundable cash contributions made by A Co to the Trustee of the EST, to fund the subscription for or acquisition on-market of A Co shares by the EST, is at a time determined by section 83A-210 of the ITAA 1997 in respect of the ESS interests that have a deferred taxing point arising on or after 1 July 2009. In reaching this decision consideration was given to 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 question 3 above, the ESS interests that were issued prior to 1 July 2009 need to be considered in accordance with the transitional provisions in the ITTPA 1997 to determine whether section 83A-210 of the ITAA 1997 or former section 139DB of the ITAA 1936 will apply in determining the timing of the deduction available under section 8-1 of the ITAA 1997. Section 83A-10 of the ITTPA 1997 broadly states that if former Division 13A of the ITAA 1936 continues to apply to the employee share scheme then Division 83A of the ITAA 1997 does not apply to the ESS interest. In the present case this means, former Division 13A of the ITAA 1936 will apply to options issued under the ESS prior to 1 July 2009 where a former section 139E election has been made. Accordingly, former section 139DB of the ITAA 1936 needs to be considered to determine when the deduction available under section 8-1 of the ITAA 1997 is allowable. Former section 139DB of the ITAA 1936 provides that: If, at a particular time, a person (the Provider) provides another person with money or other property: (a) under an arrangement; and (b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme; then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right. The effect of former section 139DB of the ITAA 1936 is that there is no deduction until the ultimate beneficiary of the employee share scheme has acquired the share or right. In accordance with former subsection 139C(4) of the ITAA 1936 states that the taxpayer does not (except for the purposes of Subdivision DA) acquire a share under an employee share scheme if the taxpayer acquires the share as a result of exercising a right that the taxpayer acquired under an employee share scheme. In the present case, the employee is taken not to acquire a share as a result of exercising their option that they have been allocated under the ESS. Accordingly, former section 139DB of the ITAA 1936 will operate to determine the timing of the deduction available to A Co for contributions it makes in respect of Options still subject to former Division 13A of the ITAA 1936. Therefore, the timing of the deduction under section 8-1 of the ITAA 1997 for the non-refundable cash contributions made by A Co to the Trustee of the EST, to fund the subscription for or acquisition on-market of A Co shares by the EST, is not deferred by the operation of former section 139DB of the ITAA 1936 in respect of the ESS interests that have a deferred taxing point arising before 1 July 2009. | Detailed Reasoning - Ordinary Income: Section 6-5 of the ITAA 1997 states that your assessable income includes income according to ordinary concepts which is called ordinary income. The classic definition in Australian law was given by Jordan CJ in Scott v. DCT (NSW) (1935) 35 SR (NSW) 215. It states that: 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. The 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 GP International Pipecoaters Pty Ltd v. FCT (1990) 170 CLR 124 the High Court held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. They further state: 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. Where, in accordance with an employee share scheme, the trustee subscribes to the company for an issue of shares, it pays the full subscription price for the shares and the company receives a contribution of share capital from the trustee. The character of the contribution of share capital received by A Co from the trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, A Co is issuing the trustee new shares in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of the share capital, and accordingly, is of a capital nature. Accordingly, when A Co receives the subscription proceeds from the Trustee of the EST where the EST subscribes for new shares in A Co to satisfy its obligations to the option holders, that subscription price received by A Co is a capital receipt. That is, it will not be on revenue account, and not ordinary income under section 6-5 of the ITAA 1997. Section 20-20 Subsection 20-20(2) of the ITAA 1997 makes an amount that is received as recoupment of a loss or outgoing assessable if you have received the amount by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or an earlier income year. A Co will receive an amount for the subscription of shares by 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) of the ITAA 1997 makes assessable a recoupment of a loss or outgoing that is deductible, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997. Recoupment is defined to include any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of a loss or outgoing. The explanatory memorandum to the Tax Law Improvement Act 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. So far as a deduction under section 8-1 of the ITAA 1997 is allowed for rates or taxes, section 20-30 of the ITAA 1997 will apply such that if there was a recoupment of that deduction, that amount would be assessable. However, it can be argued that in subscribing for new shares in A Co, the EST is acquiring new shares in A Co. This cannot be said to be a recoupment under subsection 20-25(1) of the ITAA 1997. The receipt by A Co is made in return for issuing shares to the EST, not as a recoupment of previously deducted expenditure under section 8-1 regarding to rates and taxes to which section 20-30 of the ITAA 1997 will apply. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20 of the ITAA 1997. Capital Gains Tax Section 102-20 of the ITAA 1997 states that you make a capital gain or loss, if and only if a CGT event happens. No Capital Gains Tax (CGT) events occur when the EST satisfies its obligations under the ESS by subscribing for new shares in A Co. The relevant CGT events that may be applicable when the subscription proceeds are received by A Co are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) of the ITAA 1997 states that CGT event D1 does not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, A Co is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the trustee, therefore CGT event D1 does not happen. In relation to CGT event H2, paragraph 104-155(5)(c) of the ITAA 1997 also states that CGT event H2 does not happen if a company issues or allots equity interests or non-equity shares in the company. Therefore, CGT event H2 does not occur. Since no CGT event occurs, then there is no amount that will be assessable as a capital gain to A Co. Therefore, when the EST satisfies its obligations under the ESS by subscribing for new shares in A Co, the subscription proceeds will not be included in the assessable income of A Co under section 6-5 or section 20-20 ITAA 1997, nor trigger a CGT event under Division 104 of the ITAA 1997. | Detailed Reasoning - Question 6: Part IVA of the ITAA 1936 may apply to transactions if it is reasonable to infer that a scheme was entered into for the dominant purpose of obtaining a tax benefit. Having regard to the relevant circumstances of the arrangement and the factors listed in subsection 177D(b) of the ITAA 1936, it is not considered that the dominant purpose of entering into the scheme is to enable A Co to get a deduction in respect of the irretrievable cash contributions made by A Co to the Trustee of the EST to fund the subscription for or acquisition of A Co's shares by the EST, where, the deduction or part of the deduction would not have been allowable, or might reasonably be expected not to have been allowable had the scheme not been carried out. Accordingly, the Commissioner will not apply Part IVA of the ITAA 1936 to make a determination under section 177F of the ITAA 1936 in relation to the ESS, to determine that the whole or part of the deduction in respect of cash contributions made by A Co to the Trustee of the EST to fund the subscription for or acquisition of A Co's shares by the EST shall not be allowable to A Co.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | These reasons for decision accompany the Notice of private ruling for A Co.