Private ruling: Employee share schemes
Date of advice: 6 October 2022
Published: December 2022
Date scheme commenced: In a particular income year

Ruling: Q1: Will Company X obtain a deduction under section 8-1 in respect of the irretrievable cash contributions made by Company X to the trustee for a trust (the Trustee) to fund the subscription for or acquisition on-market of ordinary shares in Company X (Shares) by the trust (the Trust)? | A4: Yes. | Q2: Will irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, be deductible to Company X at a time determined by section 83A-210 where contributions are made before the acquisition of the relevant 'ESS interests' (as defined in subsection 83A-10(1))? | A5: Yes. | Q3: If the Trust satisfies its obligation under employee share plans (the Company Plans) by subscribing for new Shares, will the subscription proceeds be included in the assessable income of Company X under sections 6-5 or 20-20 or trigger a capital gains tax (CGT) event under Division 104? | A6: No. | Q4: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, any deduction claimed by Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust? | A7: No. | Q5: Will the provision of rights or options by Company X to employees of Company X under the Company Plans be a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A8: No. | Q6: Will the irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, be treated as a fringe benefit within the meaning of section 136(1) of the FBTAA? | A9: No. | Q7: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company X, by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares? | A10: No. For questions 1 to 5 this private ruling applies for the following periods : Income tax years ending 30 June 20XX to 30 June 20XX For questions 6 to 8 this private ruling applies for the following periods : Fringe benefits tax years ending 31 March 20XX to 31 March 20XX

Relevant facts and circumstances: Company X and its incentive plans Company X is an Australian based company carrying on a business for the purpose of gaining or producing assessable income. The objective of Company X's remuneration policy is to ensure its remuneration is competitive and appropriate for the results delivered. As part of the overall remuneration policy, in addition to fixed remuneration, Company X offers shares to certain executives upon the satisfaction of certain performance conditions. This is implemented through the Company Plans. The scope of the ruling is limited to rights and options granted under the Company Plans to Australian tax-resident employees who engage in activities that derive income assessable in Australia. The Company Plans Broadly, under the Company Plans, eligible employees are offered the opportunity to acquire rights or options for nil consideration, thereby becoming Participants in the Company Plans. When a Participant satisfies the relevant Performance Conditions and therefore the rights or options vest, each right or option entitles the Participant to one Share, or the cash equivalent to the value of one Share (i.e. cash settled). Company X may use an employee share trust (EST) for the purpose of holding and delivering shares under the Company Plans. However, Company X will not use an EST for holding and delivering shares under the Company Plans where the rights or options are cash settled. For any rights or options that are cash settled, Company X will make the cash payments directly to the Participants. The Trust Company X established the Trust by Trust Deed. No trusts were used in connection with Company X's operation of the Company Plans prior to the establishment of the Trust. The Trustee of the Trust is an external trustee acting in an independent capacity on behalf of the beneficiaries of the Trust. In accordance with the Trust Deed, the Trust operates as follows: • The Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purposes of subsection 130-85(4). • The Trust was established for the sole purpose of subscribing for, acquiring, holding and transferring Shares in connection with the Company Plans, for the benefit of the Participants in those Company Plans. • No company in Company X's group (Company Group) can be a beneficiary of the Trust. • No company in the Company Group may acquire any interest in the capital, or be entitled to any income, of the Trust. • No encumbrance may be granted over any assets of the Trust by any persons, including the Trustee or any companies in the Company Group. • The Trust will be funded by contributions from Company X. All funds (other than remuneration for the Trustee in respect of its office) received by the Trustee from Company X will constitute accretions to the corpus of the Trust and must not be repaid to the Company Group (other than when subscribing for Shares in accordance with the Trust Deed and the Plan Rules), and no Participant shall be entitled to receive such funds. • These funds will be used by the Trustee of the Trust to acquire the Shares either by an on-market purchase, an off-market transaction where the shares are acquired at market value, or via a subscription for new Shares, based on the notice provided by Company X for the benefit of the Participants under the Company Plans. • Unallocated Shares are held by the Trustee on trust for the benefit of Participants generally in accordance with the terms and conditions of the Trust Deed unless and until the Shares are allocated or transferred to Participants. • Upon being directed by the Board, the Trustee must allocate the specified number of Shares to the specified Participant, on the date as directed by the Board. The Participant will become the beneficial owner of the Allocated Shares. • The Trustee will hold any and all Allocated Shares (and all other benefits and privileges attached to or resulting from the holding of the Shares) on behalf of the Participant and agrees that the Participant is absolutely entitled to these Shares (and the aforementioned benefits and privileges). It is intended under the Trust Deed that such Participants have substantially the same rights in respect of those Allocated Shares (other than bare legal title) as if the Allocated Shares were registered in the names of the relevant Participants. • The Shares may be dealt with at any time after the Restrictive Period lapses by allocating Shares to each Participant by way of transfer into the name of the Participant (i.e. legal title) (or to a third party nominated by the Participant) upon notification by the Board. • The Trustee must not pay the proceeds of sale of any forfeited Shares or transfer the forfeited Shares to a company in the Company Group. • While the Trustee must sell any fractions of Shares, the proceeds of sale must be used for the future purchase of Shares and cannot be repaid to, or held for the benefit of, a company in the Company Group. • The Trust Deed does not confer on Company X any encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee. • Cash dividends in respect of Allocated Shares must not be appropriated in or towards the repayment of any outstanding loan owed by the Participant to a company in the Company Group. • Amendments to the Trust Deed are subject to certain conditions, including that no amendments may be made if they: • confer on any company in the Company Group any rights to Shares or any other assets already in the hands of the Trustee at the time the amendments are made, or • which may prevent the Trustee from satisfying the requirements of subsection 130-85(4). • Upon termination of the Trust, the Trustee may transfer the remaining capital of the Trust to the Participants, another trustee of an EST established to administer a Company X incentive plan, a charity nominated by Company X, and/or pay certain costs and expenses incurred by the Trustee for the operation of the Trust. However, the Trustee must not provide any capital of the Trust to any company in the Company Group. • The Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office. Company X must pay such fees and reimburse such expenses incurred by the Trustee as agreed between Company X and the Trustee. • Trust expenses are paid in the first instance by the Trustee from cash dividends received in relation to Unallocated Shares or any cash held in the Trust. If there are any outstanding trust expenses, then these must be paid by Company X, and Company X must indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution of the Trust. Associated costs On-going administrative costs Company X has incurred, or will incur, various on-going administrative costs, for the services provided by the Trustee in respect of the on-going administration and management of the Trust, such as: • Employee plan record keeping • Production and dispatch of holding statements to employees • Provision of annual income tax return information for employees • Costs incurred in the acquisition of Shares on market (e.g. brokerage costs and the allocation of such Shares to Participants) • Actions necessary under the Company Plans where employees were terminated but have met vesting conditions and is entitled to Shares, and • Other trustee expenses such as the preparation and audit of the annual financial statements and the preparation of the annual income tax returns of the Trust. Costs of managing tax affairs Company X has also incurred, or will incur, various costs related to managing its tax affairs, such as for: • Advice regarding the accounting treatment of equity settled arrangements • Legal advice fees incurred in drafting any agreements related to the on-going operation of the Trust and not related to the establishment of the Trust or amending the Trust Deed or the rules of the Company Plans, and • Tax advice associated with the drafting and lodgement of the application for this private ruling. Establishment costs Company X has also incurred, or will incur, various costs in relation to the establishment of the Trust, such as for: • Legal advice obtained in respect of the implications which may arise for both Company X and the Participants of the Company Plans in respect of the employee share trust structure • Legal documents required in respect of the establishment of the Trust and the Company Plans • Legal advice obtained in respect of the drafting of changes required to the Plan Rules in order to accommodate the employee share trust structure, and • Professional fees associated with the establishment of the Trust including such costs associated with the creating and registration of the Trust with various authorities.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 8-10 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 section 25-5 | Income Tax Assessment Act 1997 paragraph 40-25(7)(a) | Income Tax Assessment Act 1997 section 40-880 | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 section 83A-105 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 83A-340 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 104-155(5)(c) | Income Tax Assessment Act 1997 subsection 130-85(4) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 974-75 | 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)

Reasons for decision: Summary: Company X will be entitled to deduct an amount under section 8-1 for the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust to satisfy its obligations under the Company Plans as they are irretrievable and incurred in the process of carrying on a business for gaining or producing Company X's assessable income. | Detailed Reasoning - Detailed reasoning: Subsection 8-1(1) allows you to deduct from your assessable income any loss or outgoing to the extent that it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, pursuant to subsection 8-1(2), you cannot deduct a loss or outgoing to the extent that it is a loss or outgoing of capital, or of a capital nature. | Detailed Reasoning - Sufficient Nexus: For a deduction to be allowable under subsection 8-1(1), there must be sufficient nexus between the loss or outgoing and the gaining or producing of assessable income. [1] Company X carries on a business for the purposes of gaining or producing assessable income. Company X operates the Company Plans as part of its overall remuneration policy. Under the Company Plans, Company X grants rights and options to Participants of the Company Plans and each vested right or option entitles the Participant to one Share (or cash payment equivalent to the value of one Share as determined by the Board). Company X may utilise a trust for the purposes of acquiring, holding and delivering Shares under the Company Plans. Under the Trust Deed, Company X must make cash contributions to the Trust to enable the Trustee to acquire Shares either on-market or by subscription for allocation to Participants. Where the rights and options are determined by the Board to be satisfied by cash settlement, the cash payments are made directly to the Participants and does not involve the Trust. Therefore, the cash contributions made by Company X to the Trustee for the acquisition of Shares by the Trustee to satisfy its obligations under the Company Plans arise as part of Company X's remuneration arrangements with its employees. As such, they have a sufficient nexus with the business carried on by Company X and directly relate to the production of Company X's assessable income. | Detailed Reasoning - Incurred in carrying on a business: For the cash contributions made by Company X to the Trustee to be deductible under section 8-1 by Company X, the contribution must be a permanent loss or outgoing to which Company X has definitely committed itself. [2] Broadly, an employer incurs the contribution made to an EST only when the ownership of that contribution passes from the employer to the Trustee and there is no circumstance in which the employer can retrieve any of the contribution. [3] The contributions made by Company X are irretrievable and non-refundable to Company X (including to any member of the Company Group) in accordance with the Trust Deed because: • All funds received by the Trustee from Company X constitutes accretions to the corpus of the Trust and cannot be repaid to Company X or any other company in the Company Group, other than to subscribe for Shares in accordance with the Trust Deed or the Company Plans • While the Trustee must sell any fractions of Shares, the proceeds of sale must be used for the future purchase of Shares and cannot be repaid to, or held for the benefit of, a company in the Company Group • The Trust Deed does not confer on Company X any encumbrance, proprietary right or proprietary interest in the Shares acquired by the Trustee • The Trustee must not pay the proceeds of sale of any forfeited Shares or transfer the forfeited Shares to a company in the Company Group • Cash dividends in respect of Allocated Shares must not be appropriated in or towards the repayment of any outstanding loan owed by the Participant to a company in the Company Group • No company in the Company Group is a beneficiary of the Trust • No company in the Company Group may acquire any interest in the capital, or be entitled to any income, of the Trust • No amendment to the Trust Deed may be made which confers on Company X, nor any member of the Company Group, any right to any money, property or Shares already in the hands of the Trustee at the time the amendment is made, and • Upon termination of the Trust, the Trustee must not provide any capital of the Trust to any company in the Company Group. Therefore, the cash contributions made to the Trust are part of an on-going series of payments in the nature of remuneration of its employees. | Detailed Reasoning - Not capital or of a capital nature: Generally, a contribution made by an employer to a trust established to provide incentive payments to participating employees will be on revenue account and is not capital or capital in nature. [4] The costs will be an outgoing incurred for periodic funding of grants of rights and options for employees of Company X. The costs incurred are likely to be in relation to more than one grant of rights or options (rather than being one-off), and Company X intends to satisfy outstanding rights or options using Shares acquired by the Trust. This indicates that the irretrievable contributions to the Trust are ongoing in nature. The advantage provided by each payment to the Trustee does not have a lasting quality because it forms part of the broader remuneration expenditure of Company X's employees. As stated by the Federal Court in Spotlight : [5] ...the advantage to be obtained was giving staff an incentive to greater effort from year to year and was thereby related to the profitability of the taxpayer from year to year. Therefore, the payments are not capital or of a capital nature, so paragraph 8-1(2)(a) is not satisfied. | Summary: Company X will obtain a deduction under section 8-1 in respect of costs incurred by Company X in relation to the on-going administration of the Trust. | Detailed Reasoning - Detailed reasoning: As discussed above, Company X carries on a business which produces assessable income and Company X operates the Company Plans as part of its overall remuneration policy. Under the Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office. Company X must pay such fees and reimburse such expenses incurred by the Trustee as agreed between Company X and the Trustee. Further, trust expenses must be paid by Company X, and Company X must indemnify the Trustee in respect of all liabilities, costs and expenses incurred by the Trustee in the execution of the Trust. The on-going administration costs outlined in the facts are regular and recurrent employment expenses necessarily incurred by Company X in operating a remuneration framework while carrying on a business for the purposes of gaining or producing its assessable income. Relevantly, these costs are not capital or of a capital nature and Company X will obtain a deduction under section 8-1 in respect of those costs (Taxation Determination TD 2022/8 Income Tax: deductibility of expenses incurred in establishing and administering an 'employee share scheme' ). | Summary: Company X will obtain a deduction under section 25-5 in respect of costs incurred by Company X in managing the tax affairs of the Trust. | Detailed Reasoning - Detailed reasoning: Section 8-10 states that if more than one income tax deduction provision applies to an amount, the most appropriate provision should be used (i.e. the specific provision should override the general provision). Division 12 sets out particular types of deductions that are dealt with by a specific provision of either the ITAA 1936 or the ITAA 1997. Section 25-5 is one such provision listed in Division 12 dealing with tax-related expenses. Subsection 25-5(1) allows a deduction for tax-related expenses, such as managing your tax affairs (paragraph 25-5(1)(a)). To the extent the costs incurred by Company X relate to managing its tax affairs, they are tax-related expenses deductible by Company X under subsection 25-5(1). | Summary: Company X will obtain a deduction under section 40-880 in respect of costs incurred by Company X in relation to the establishment of the Trust. | Detailed Reasoning - Detailed reasoning: As explained in Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 ( Sharpcan ), section 40-880 covers deductions that are allowed for business related expenses, its purpose being to target: [6] "black hole" expenditure, namely business expenses incurred by taxpayers that fall outside the scope of deduction provisions of income tax law. Thus, as s 40-880(1) provides, a deduction under s 40-880 is "only allowed to the extent that the expenditure is not taken into account in some way elsewhere in the income tax law". The Commissioner's current view in relation to the deductibility of costs incurred in relation to the establishment of an EST is contained in TD 2022/8. Paragraph 3 of TD 2022/8 provides that establishment expenses are not deductible to the employer company under section 8-1 because they are capital in nature. Paragraph 4 of TD 2022/8 provides that establishment expenses are deductible to the employer company in equal proportions over five years under section 40-880 to the extent that the business is carried on for a taxable purpose. Pursuant to paragraph 40-25(7)(a), the purpose of producing assessable income is a taxable purpose. Company X carries on a business which produces assessable income. Company X operates the Company Plans as part of its overall remuneration policy. Therefore, Company X carries out its business for a taxable purpose and accordingly the establishment expenses incurred by Company X in relation to establishing the Trust is deductible under section 40-880 in equal proportions over five years. | Summary: The irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, will be deductible to Company X at a time determined by section 83A-210 where the contributions are made before the acquisition of the relevant ESS interests. | Detailed Reasoning - Detailed reasoning: Section 83A-210 applies to determine the timing of the deduction of contributions provided under an employee share scheme (ESS) arrangement, but only if the contribution is made before the 'ESS interest' is acquired by the ultimate beneficiary under an ESS. The effect of section 83A-210 is to deem the timing an employer incurred the outgoing to be the time when the ESS interest is acquired by the ultimate beneficiary, rather than the time when the employer makes the contribution to the trust. Further information is available 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 . 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 a company. The rights and options issued under the Company Plans are ESS interests (if they are ultimately satisfied with Shares instead of cash settled). The Company Plans are ESSs for the purposes of subsection 83A-10(2) as they are schemes under which ESS interests (i.e. the rights or options) are provided to employees (i.e. Participants) in relation to their employment with Company X or its subsidiaries. However, the rights and options granted under the Company Plans are indeterminate rights for the purposes of section 83A-340. That is because the rights and options can be settled by either Shares or by making a payment of a cash equivalent amount. Therefore, the rights and options are not rights to acquire a beneficial interest in Shares unless and until the time when it is determined by the Board that they will be satisfied by the provision of Shares. Once it is determined that they will be satisfied by provision of Shares, section 83A-340 operates to treat these rights and options as though they had always been rights to acquire beneficial interests in shares (therefore, an ESS interest) for the purposes of section 83A-210. If irretrievable contributions are provided to the Trustee before these rights and options are acquired (and they do subsequently become ESS interests by virtue of section 83A-340), section 83A-210 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 to be the income year in which Participants originally acquire the rights or options under the Company Plans. Note, where the rights or options do not become an ESS interest because they are ultimately satisfied through cash settlement, the cash outgoing will not flow through or involve the Trust. If they did flow through the Trust, the Trust would not satisfy the sole activities test for the purposes of subsection 130-85(4). | Summary: If the Trust satisfies its obligations under the Company Plans by subscribing for new Shares, the subscription proceeds will not be included in the assessable income of Company X under sections 6-5 or 20-20, nor trigger a CGT event under Division 104. | Detailed Reasoning - Ordinary Income: Section 6-5 provides that your assessable income includes income according to ordinary concepts which is called ordinary income. As a general rule, amounts received as a result of carrying on a business should represent ordinary income. However, receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In GP International Pipecoaters v Federal Commissioner of Taxation [1990] HCA 25, the High Court of Australia found that: To determine whether a receipt is of an income or of a capital character, various factors may be relevant. Sometimes, the character of receipt 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. The character of the contribution of share capital received by Company X from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Here, Company X is issuing the Trustee with new shares in itself. The character of the newly issued share is one of capital. Therefore, the receipt of the subscription proceeds takes the character of share capital, and accordingly, is of a capital nature. This view is supported by the reasoning in ATO Interpretative Decision ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee . In conclusion, when Company X receives subscription proceeds from the Trustee where the Trustee has subscribed for new Shares to satisfy obligations to Participants, that subscription proceeds received by Company X is a capital receipt, and will not be ordinary income in the hands of Company X under section 6-5. | Detailed Reasoning - Section 20-20: Subsection 20-20(2) provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. Company X will receive an amount for the subscription of Shares by the Trustee. 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) establishes that an amount received by you as 'recoupment' of a loss or outgoing is an 'assessable recoupment' if you can deduct the loss or outgoing for an earlier income year under a provision listed in section 20-30. None of the provisions listed in section 20-30 are relevant to the current circumstances. Therefore, the subscription proceeds will not be an assessable recoupment under section 20-20. | Detailed Reasoning - CGT - Division 104: Section 102-20 states that you make a capital gain or loss if and only if a CGT event happens. The relevant CGT events that may be applicable when the subscription proceeds are received by Company X are CGT events D1 (creating a contractual or other rights) and H2 (receipt for event relating to a CGT asset). However, paragraphs 104-35(5)(c) and 104-155(5)(c) respectively states that CGT event D1 and CGT event H2 do not happen if a company issues or allots equity interests or non-equity shares in the company. In this case, Company X is issuing shares, being equity interests as defined in section 974-75, to the Trustee. Therefore, neither CGT event D1 nor CGT event H2 will occur. Since no CGT event occurs, there is no amount that will be assessable as a capital gain to Company X under Division 104. | 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 Company X in respect of the irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares by the Trust. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 is a general anti-avoidance provision which gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA of the ITAA 1936 applies. The Commissioner generally accepts that a deduction may be available where an employer provides money or other property to an EST where the conditions of Division 83A are met. In this case, the scheme does not contain the elements of artificiality or unnecessary complexity and the commercial drivers sufficiently explain the entry into the use of an arrangement that requires an EST. Therefore, having regard to the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of enabling Company X to obtain a tax benefit. | Summary: The provision of rights or options by Company X to employees of Company X under the Company Plans will not be a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: An employer's liability to fringe benefits tax (FBT) arises under section 66 of the FBTAA, which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. In general terms, a 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a fringe benefit by virtue of paragraphs (f) to (s) of the definition of fringe benefit. n particular, paragraph (h) of the definition of fringe benefit excludes the following from being a fringe benefit: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the ITAA 1997) to which Subdivision 83A-B or 83A-C of that Act applies As discussed above, the Commissioner accepts that the Company Plans are ESSs. Specifically, the rights and options provided under the Company Plans (that are ultimately satisfied with Shares instead of cash) are ESS interests for the purposes of subsection 83A-10(2) by virtue of section 83A-340 and the Company Plans are schemes under which ESS interests in Company X are provided to the employees of Company X in relation to their employment with Company X. As the rights and options are granted under the Company Plans for nil consideration, they are acquired by the Participants at a discount and therefore Subdivision 83A-B applies, unless the conditions in subsection 83A-105(1) are satisfied, in which case Subdivision 83A-C applies. Accordingly, the provision of rights and options under the Company Plans (that are ultimately satisfied with Shares) will not be a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. In addition, the later exercise of a right or option will not give rise to a fringe benefit as defined in subsection 136(1) of the FBTAA as any benefit received by the employee (i.e. the beneficial interest in a Share) would be in respect of the exercise of the right or option under the Company Plans and not in respect of employment (refer to 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 ). For completeness, where a Participant's rights or options are ultimately satisfied with cash instead of Shares, the granting of the rights or options will be viewed as a series of steps in the payment of salary or wages which are excluded from being a fringe benefit by paragraph (f) of the definition of fringe benefit in subsection 136(1) of the FBTAA. This outcome is consistent with ATO Interpretative Decision ATO ID 2010/142 Fringe Benefits Tax Employee share scheme: indeterminate rights not fringe benefits . | Summary: The irretrievable cash contributions made by Company X to the Trustee, to fund the subscription for or acquisition on-market of Shares by the Trust, will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Detailed reasoning: Another type of benefit excluded from being a fringe benefit, pursuant to paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA, is a benefit constituted by the acquisition of money or property by an EST within the meaning of the ITAA 1997. Therefore, for the irretrievable cash contributions to be excluded from the definition of fringe benefit, the Trust must be an EST as defined in subsection 130-85(4). In examining whether the requirements of subsection 130-85(4) are met, it is the activities of the trustee in relation to a particular trust that is relevant. To qualify as an EST, a trustee's activities must be limited to: • obtaining shares or rights in a company (paragraph 130-85(4)(a)) • ensuring that ESS interests in the company that are beneficial interest in those shares or rights are provided under the ESS to employees, or to associates of employees, of the company or a subsidiary of the company (paragraph130-85(4)(b)), and • other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b) (paragraph 130-85(4)(c)). Paragraphs 130-85(4)(a) and (b) are satisfied because: • The Trust acquires shares in a company, namely Company X, and • The Trust ensures that ESS interests as defined in subsection 83A-10(1) (being the rights and options where they are not cash settled) are provided under an ESS (that is, the scheme established by the Company Plans) by allocating those ESS interests to employees of Company X in accordance with the Trust Deed and the Plan Rules. [7] Paragraph 130-85(4)(c) provides that a trustee can engage in activities that are merely incidental to those described in paragraphs 130-85(4)(a) and (b). The Commissioner's views on the types of activities that are merely incidental and not merely incidental are set out in Taxation Determination TD 2019/13 Income tax: what is an 'employee share trust'? . Activities that result in employees being provided with additional benefits are not considered to be merely incidental. In the present case, the Trust established by the Trust Deed contains only powers and/or duties that relate to the activities described in paragraphs 130-85(4)(a) and (b), or to activities that are merely incidental as required by subsection 130-85(4)(c). Accordingly, the Commissioner is satisfied that the Trust is an EST as defined in subsection 130-85(4). Therefore, the irretrievable cash contributions made by Company X will not be fringe benefits within the meaning of section 136(1) of the FBTAA as they are excluded by paragraph (ha) of the definition of fringe benefit under subsection 136(1) of the FBTAA. | Summary: The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the fringe benefits taxable amount to Company X by the amount of tax benefit gained from irretrievable cash contributions made by Company X to the Trustee to fund the subscription for or acquisition on-market of Shares. | Detailed Reasoning - Detailed reasoning: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules explains the application of Part IVA of the ITAA 1936 and other general anti-avoidance rules to an arrangement, including the operation of section 67 of the FBTAA (refer to paragraphs 185-191 of PS LA 2005/24). The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. Paragraph 191 of PS LA 2005/24 states: 191. The approach outlined in this practice statement (refer to paragraphs 75 to 150) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant (except that amendments corresponding to the 2013 amendments of Part IVA have not been made to section 67) and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. As discussed above, the irretrievable cash contributions made by Company X to the Trust will not be a fringe benefit as defined in subsection 136(1) of the FBTAA, nor would the grant of ESS interest (or cash payments) to Participants under the Company Plans, if an EST was not used. As a result, the FBT liability of Company X is not any less than it would have been but for the existence of the arrangement (i.e. the EST). Therefore, the Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company X by the amount of the tax benefit gained from the irretrievable cash contributions made by Company X to the Trustee. [1] Ronpibon Tin NL v Commissioner of Taxation (Cth) [1949] HCA 15. [2] Commissioner of Taxation (Cth) v James Flood Pty Ltd [1953] HCA 65. See also Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions and Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance [3] Pridecraft Pty Ltd v. Federal Commissioner of Taxation [2004] FCAFC 339 ( Pridecraft ) and Spotlight Stores Pty Ltd v. Commissioner of Taxation [2004] FCA 650 ( Spotligh t ) [4] See Spotlight which was affirmed by the Full Federal Court in Pridecraft . [5] Spotlight at paragraph 71. [6] Sharpcan at paragraph 46. [7] Note that the beneficial interest in the share acquired on exercise of the rights is itself provided under an ESS because it is provided under the same ESS under which the rights are provided to the employee in relation to the employee's employment.

Question 2A: Will Company X obtain a deduction under section 8-1 in respect of costs incurred by Company X in relation to the on-going administration of the Trust? | Question 2B: Will Company X obtain a deduction under section 25-5 in respect of costs incurred by Company X in managing the tax affairs of the Trust? | Question 2C: Will Company X obtain a deduction under section 40-880 in respect of costs incurred by Company X in relation to the establishment of the Trust? | All legislative provisions are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.