Private ruling: Employee Share Scheme
Date of advice: 18 August 2016
Published: September 2016

Ruling: Q1: Will the Employer obtain an income tax deduction pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee of the Trust to fund the subscription for, or acquisition on-market of, ordinary shares in the Employer shares by the Trust? | A1: Yes | Q2: Will the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee, to fund the subscription for or acquisition on market of Employer shares by the Trust, be deductible to Employer at the time worked out in accordance with section 83A-210 of the ITAA 1997? | A2: Yes | Q3: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act (ITAA 1936) applies to deny, in part or full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for, or acquisition on-market of, Employer shares by the Trust? | A3: No This ruling for questions 1 to 3 inclusive each applies for the following period: | Q4: Will the irretrievable cash contributions made by the Employer or made by another entity that is a member of the Employer group of companies to the Trustee to enable the Trust to subscribe for, or acquire on-market, Employer shares, be treated as a 'fringe benefit' provided by the Employer or by the relevant entity within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)? | A4: No

Relevant facts and circumstances: Background The Employer is a listed Australian company and the head company of an income tax consolidated group. Employees of the Employer and of various subsidiary members of the Employer income tax consolidated group may benefit under the employee share plan (the Plan). The Plan The Employer established the Plan for key employees of the business as part of its long-term strategy of creating wealth. The Plan is governed by Plan Rules. Participants in the Plan are employees of the Employer and of various subsidiary members of the Employer. The Plan is to reward, motivate, promote and attract senior executives and selected employees who are important to the Employer's long term growth and wealth creation. The Plan enables eligible employees to share in the growth of the Employer through grants of performance rights. The performance rights are capable being of exercised into ordinary shares following the satisfaction of certain vesting conditions. Under the current offer, the performance rights will be subject to time-based vesting and performance-based conditions. The Plan broadly operates as follows: • It is at the absolute discretion of the Employer to issue written invitations to Eligible Participants to apply for up to a specified number of performance rights • Subject to the terms attaching to the performance rights, each performance right entitles the Eligible Participant to one fully paid ordinary share in Employer • A performance right granted under the Plan may not be exercised unless the vesting conditions attaching to that performance right are met • The Employer will advise the Eligible Participant of the achievement, satisfaction or waiver of a vesting condition • The price that an Eligible Participant will pay when exercising that performance right is as specified in the relevant invitation • Once all conditions on the performance rights, as determined by the Employer, have been satisfied, Eligible Participants will be entitled to exercise the performance rights • The exercise of any performance right granted under the Plan will be effected in the form and manner determined by the Employer, and will be accompanied by payment of the exercise price • Performance right are automatically exercised on the satisfaction of the vesting conditions • After a performance right under the Plan is exercised by an Eligible Participant, the Employer must promptly issue or procure the transfer of the said number of shares • A performance right will lapse when there is a failure to meet the performance right's vesting condition in the prescribed period • A performance right that is not exercised will automatically lapse on the 7 th anniversary of its Grant date, unless an earlier lapsing date applies, and • Performance rights are not transferable without the prior written consent of the Employer. Employee Scheme Share Trust The Employer established an employee share scheme trust (the Trust), a sole purpose trust to subscribe for, or acquire, allocate, hold and transfer shares for participating employees pursuant to the Plan and the appointment of a trustee to operate the Trust as Trustee (the Trustee). The establishment of the Trust for such a purpose is allowed under the Plan Rules. The trust will operate in accordance with the Trust Deed. The Trustee is not permitted to carry out activities that are neither matters nor things which are necessary or expedient to administer and maintain the Trust. The Trustee must not carry out activities which result in the Participants being provided with additional benefits other than the benefits that arise from the relevant Plan rules and/or relevant terms of Participation. The Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of the performance of its obligations as trustee of the Trust. The Employer may pay to the Trustee from its own resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Employer 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 Trust will be managed and administered so that it satisfies the definition of 'employee share trust' in subsection 130-85(4) of the ITAA 1997. The Trust will operate as follows: • The Trust will be funded by contributions from the Employer or its subsidiaries (for example, for the purchase of shares in accordance with the Plan • These contributions will be used by the Trustee to purchase shares in the Employer either on-market or via a subscription for new shares in the Employer (or through a combination of both), based on written instructions from Employer • Shares acquired by the Trustee will be allocated to the Participant following the exercise of the performance rights. The Participant will become absolutely entitled to such shares • The Trustee can sell shares on behalf of a Participant where permitted to do so by the Participant • The Trustee will, in accordance with instructions received pursuant to the Plan rules, subscribe for, purchase or allocate the Employer shares for the benefit of Participants provided that the Trustee receives sufficient funds from the Employer to subscribe for or purchase such shares and/or has sufficient unallocated trust shares available • The Trustee must establish and maintain a separate trust share account or record in respect to each Participant • While the Employer shares are held in trust, the Participant will be entitled to dividend and voting rights. These shares may be subject to disposal restrictions, including but not limited to imposing a holding lock, and • All funds received by the Trustee from the Employer will constitute accretions to the corpus of the trust and will not be repaid to the Employer and no Participant shall be entitled to receive such funds. The contributions will not be repaid to the Employer unless they are used to subscribe for shares. Contributions made by the Employer to the Trust The Employer will not make cash contributions significantly in excess to the market value of shares that have been and will be acquired for employees. The Trust will use the cash contributions exclusively to purchase shares in the Employer for employees under the Plan and, pending such an acquisition, form part of the Trust's assets. Shortly after vesting, the Trustee will then allocate shares to the relevant Participants, having subscribed for or acquired on-market sufficient shares to fulfil the obligation as necessary. The Trustee of the Trust holds and will hold all shares pursuant to the Plan on capital account. Use of the Trust to facilitate the Plan All dealings between the parties are conducted according to the rules set out in the Plan and the Trust Deed. The Employer chose to use an employee share trust for a range of reasons in addition to the Trust being a vehicle for the delivery of shares to employees. In the present case, the Trust: • is the most effective means to acquire sufficient on-market shares to satisfy the estimated share performance vesting requirements, without the need to dilute current shareholdings or pay excessive prices for on-market acquisitions immediately prior to performance rights vesting • provides the opportunity to improve cash flow management through the flexibility to control the timing of contributions being made to the Trust to enable it to acquire shares • provides the flexibility to acquire and warehouse shares that will be delivered to employees under its employee share plan • aligns with the capital management strategy of the company - it enables the shares that will be delivered to employees to be acquired on-market or by subscription • gives an Eligible Participant the knowledge that the shares, and any incidental dividend income, will be held by a trust, and • enables easier administration of the Plan because the holding and accounting of the shares are separated from the company.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | 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 177A(1) | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 subsection 177CB(2) | Income Tax Assessment Act 1936 subsection 177CB(3) | Income Tax Assessment Act 1936 subsection 177CB(4) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 subsection 177F(1) | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | 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-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 paragraph130-85(4) | Income Tax Assessment Act 1997 paragraph130-85(4)(a) | Income Tax Assessment Act 1997 paragraph130-85(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 subsection 995-1(1)

Reasons for decision: Summary: The Employer will obtain an income tax deduction pursuant to section 8-1 in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for or acquisition on-market of Employer shares by the Trust. | Detailed Reasoning - Detailed reasoning: The Commissioner accepts that the cash contributions that the Employer will make to the Trustee of the Trust in accordance with the Trust Deed and Plan rules, which will enable the Trust to subscribe for or acquire Employer shares on-market for the benefit of Participants, will constitute 'irretrievable cash contributions'. The irretrievable cash contributions will be deductible under section 8-1 if either of the positive limbs in subsection 8-1(1) are satisfied and the contributions do not fall within any of the negative limbs in subsection 8-1(2). The relevant negative limb is paragraph 8-1(2)(a), which denies a deduction to the extent that the expenditure is capital, or of a capital nature. Positive Limb The Employer provides or will provide cash contributions to the Trustee to be used in accordance with the Trust Deed and Plan rules for the sole purpose of subscribing for and/or acquiring Employer shares on-market for the benefit of Participants. Such contributions are irretrievable or non-refundable to the Employer and therefore an outgoing is incurred. The Trust was established for the sole purpose of obtaining fully paid ordinary shares in the Employer for the benefit of Participants. The purpose of the contributions is to enable the Trust to acquire shares in order to provide an incentive to employees that is linked to the operating performance of the Employer business. Accordingly, there is a sufficient nexus between the Employer's contributions to the Trustee and the derivation of its assessable income ( Herald and Weekly Times Ltd v FCT (1932) 48 CLR 113; (1932) 2 ATD 169 ), Amalgamated Zinc (De Bavay's) Ltd v FCT (1935) 54 CLR 295; (1935) 3 ATD 288 , W Nevill & Co Ltd v FC of T (1937) 56 CLR 290; 4 ATD 187; (1937); 1 AITR 67 , Ronpibon Tin NL v FCT (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431 , Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; (1956) 6 AITR 379; (1956) 11 ATD 147) . This is consistent with the Commissioner's view set out in 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 that where the purpose of an employee share scheme is to provide a benefit to a company's employees as part of the overall remuneration of the employees, the company is entitled to a deduction under section 8-1 for its irretrievable cash contributions made to the trustee of its employees' share scheme trust. Accordingly, the irretrievable cash contributions that Employer will make to the Trustee will satisfy the positive limb for an income tax deduction under section 8-1. Negative Limb In Pridecraft Pty Ltd v FC of T [2004] FCAFC 339; 2005 ATC 4001; 58 ATR 210 and FC of T v Spotlight Stores Pty Ltd [2004] FCA 650; 2004 ATC 4674; 55 ATR 745, payments made by an employer company to a trust which was established for the purpose of providing incentive payments to employees were held to be on revenue account and neither capital nor of a capital nature. 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 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 which is capable of having an enduring nature. The Employer's cash contributions are revenue in nature as the amount and timing of the contributions are designed to correspond to meeting obligations within a relatively short period of time to deliver shares to employees and those obligations are accepted as being components of employee remuneration. As the Employer's cash contributions to the Trustee are part of the overall remuneration provided to the Employer's employees, the Commissioner accepts that the contributions are not capital or capital in nature. 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 differing 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. Advantages of a capital nature will be considered small or trifling if the capital advantage obtained is permanently diminished within a relatively short period of time. In this case, the outgoings incurred by the Employer by way of contributions to the Trust in order to carry on its business are either not capital in nature or any capital component is sufficiently small or trifling such that the Commissioner will not seek to apportion the deduction. | Summary: Irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee, to fund the subscription for or acquisition on-market of Employer shares by the Trust, will be deductible to the Employer at a time worked out in accordance with section 83A-210. | 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 Employer 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 contributions provided to the Trustee, and the acquisition of ESS interests (directly or indirectly) by the Employer under the Plan in relation to the Participant's employment. 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, a Performance Right granted to a Participant is or will be an ESS interest as it is or will be a right to acquire a beneficial interest in a share in the Employer. The term 'employee share scheme' is defined in subsection 83A-10(2) as: a *scheme under which *ESS interests in a company are provided to employees, or *associates of employees, (including past or prospective employees) 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 under which an ESS interest (that is, a beneficial interest in a right to acquire a beneficial interest in a share of the Employer), is provided to Participants in relation to their employment in the Employer in accordance with the Trust Deed. Division 83A will apply, broadly, if an ESS interest is acquired at a discount under an employee share scheme. The ESS interests acquired by the Participants under the Plan will be acquired at a discount as they have a nil exercise price amount. ESS interest acquired by the Trustee of the EST A share acquired by the Trustee to satisfy a Performance Right granted under the employee share scheme to an employee in relation to the employee's employment, is itself acquired under the same scheme. The granting of Performance 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 the 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 operates as intended. If the irretrievable cash contributions are provided before the Performance Rights are granted to the Participants, then section 83A-210 will apply to determine the timing of deduction of the cash contributions under section 8-1. In this instance the contribution will only be deductible to the Employer in the income year when the relevant performance rights are granted to Participants. This is consistent with the ATO-view set out 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. However, section 83A-210 will not apply to a deduction for the purchase of shares to satisfy the obligation arising from Performance Rights that have already been granted. | Summary: The Commissioner will not seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer (or made by any subsidiary member of the Employer income tax consolidated group) to the Trustee to fund the subscription for or acquisition on-market of Employer shares by the Trust. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. Part IVA gives the Commissioner the discretion to cancel a 'tax benefit' that was obtained, or would be obtained, but for section 177F of the ITAA 1936, by a taxpayer in connection with a scheme to which Part IVA applies. Law Administration Practice Statement PS LA 2005/24 provides instructions and practical guidance to Tax Officers on the application of Part IVA and other General Anti-Avoidance Rules. PS LA 2005/24 is publicly available on the ATO website. The following requirements must be present before the Commissioner can exercise the discretion in respect of Part IVA under subsection 177F(1) of the ITAA 1936 (paragraph 47 of PS LA 2005/24): (i) a 'tax benefit', as identified in section 177C, was or would but for subsection 177F(1), has been obtained; (ii) the tax benefit was or would have been obtained in connection with a 'scheme' as defined in section 177A; and (iii) having regard to section 177D, the scheme is one to which Part IVA applies. The Scheme Subsection 177A(1) of the ITAA 1936 provides that 'scheme' means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct This definition is sufficiently wide to cover the Plan, which use payments made by the Employer to the Trustee (in accordance with the Trust Deed) to fund the Trustee to enable the acquisition of Employer shares for the benefit of Participants. Tax Benefit Broadly, subsection 177C(1) of the ITAA 1936 provides that a tax benefit exists for the purposes of Part IVA of the ITAA 1936 where it might reasonably be expected that an amount would be included in assessable income, a deduction would not be allowable, a capital loss would not be incurred, or a foreign tax credit would not be allowable to the taxpayer in a year of income, if the scheme had not been entered into or carried out. Determining whether this is the case depends on the facts and involves 'a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable'. This prediction is often referred to as the 'counterfactual'. Within the above statutory parameters, the Applicant examined predictions of events for the purpose of concluding upon a postulate that is a reasonable alternative to the entering into or carrying out of the scheme. According to the Applicant, if the Employer directly provided eligible employees with an increase in salary, it would not receive a deduction for the same amount as under section 8-1 in respect of issuing the shares; any deduction received would be limited to that allowable under section 83A-205. Therefore by using a Trust, a tax benefit is created through the greater deduction the Employer will receive under section 8-1 for the irretrievable cash contributions it makes to the Trustee. The Employer is unable to acquire shares in itself or hold shares in itself under Australian Corporations legislation without cancelling the shares, whether or not for the benefit of employees. Where the irretrievable cash contributions made by the Employer are in turn used by the Trust to subscribe for Employer shares, it might be said that the Employer has not suffered a permanent loss or outgoing as such. In this sense, the tax benefit is an allowable deduction for an expense incurred which is largely reimbursed, albeit with additional shares on issue. Applicable purpose test In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in subsection 177D(2) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme. Having regard to the Part IVA analysis set out in the ruling request and the Commissioner's consideration of the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner will not make a determination under section 177F of the ITAA 1936 in respect of the Employer to deny, in part or in full, any deduction claimed by the Employer in respect of the irretrievable cash contributions made by the Employer to the Trust to fund the subscription for, or acquisition on-market of, Employer shares by the Trust. | Summary: The irretrievable cash contributions made by the Employer or made by another entity that is a member of the Employer group of companies to the Trustee to enable the Trust to subscribe for or acquire on-market Employer shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986. | Detailed Reasoning - Detailed reasoning: Subsection 136(1) of the FBTAA 1986 defines a 'fringe benefit', in relation to an employee, as a benefit in respect of the employment of the employee, but 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 ); … An 'employee share trust' is defined in subsection 995-1(1) as having the meaning given by subsection 130-85(4). Subsection 130-85(4) provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2)) is a trust for which the 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). As stated in the Detailed reasoning for Question 2 above, the right to acquire a beneficial interest in an Employer share is an ESS interest within the meaning of subsection 83A-10(1) and the Plan is an employee share scheme within the meaning of subsection 83A-10(2). Under the Plan, the employer established the Trust to acquire shares in the Employer and to allocate those shares to employees of the Employer and its subsidiaries. Therefore, paragraphs 130-85(4)(a) and (b) are satisfied because: • the Trust acquires shares in the Employer, and • the Trust ensures that the ESS interests being beneficial interests in those shares , are provided under an employee share scheme, to the employees in accordance with the Trust Deed and relevant rules of the Plan. In undertaking the activities mentioned in paragraphs 130-85(4)(a) and (b), the Trustee will be required to undertake incidental activities that are a function of managing the Plan and administering the Trust. For the purposes of 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 sets out that activities which are merely incidental include: • the opening and operation of a bank account to facilitate the receipt and payment of money • the receipt of dividends in respect of shares held by the Trust on behalf of an employee, and their distribution to the employee • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries, and • receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental. The purposes of paragraph 130-85(4)(c) are also reflected under the Trust Deed. The reinforces this as it states that Employer established the trust for the purpose of acquiring, holding and transferring shares in connection with equity incentive plans established by the Employer for the benefit of Participants in those plans. The Trust is an employee share trust, as defined in subsection 995-1(1), as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and (b) and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c). Consequently, paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA 1986 excludes the contributions to the Trustee of the Trust. Accordingly, the irretrievable cash contributions that the Employer will make, or any subsidiary of the Employer will make, to the Trustee of the Trust, to fund the subscription for or acquisition on-market of Employer shares, will not constitute a 'fringe benefit' within the meaning of subsection 136(1) of the FBTAA 1986.

Reasons for decision: All legislative references are to provisions of the ITAA 1997 unless otherwise stated. | Questions 1 to 3 -application of the single entity rule in section 701-1 | The income tax consolidation provisions allow certain groups of entities to be treated as a single entity for Australian 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 the subsidiary members cease to be recognised as separate entities during the period they are members of the 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, the actions and transactions of the Employer or a subsidiary member of the Employer tax consolidated group are treated as having been undertaken by the Employer as the head company of the Employer tax consolidated group for Australian income tax purposes.