Private ruling: Employee share scheme
Date of advice: 10 February 2016
Published: March 2016

Ruling: Q1: Will Company A, as the head entity of the Company A income tax consolidated group, be entitled to deduct an amount under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the irretrievable cash contributions made to Company B (Trustee), as trustee of the trust established by the Company A Share Plan Trust Deed (ESP Trust Deed), to fund the subscription for, or acquisition on market of, Company A's shares to satisfy ESS interests issued pursuant to the Company A Share Rights Plan? | A1: Yes. | Q2: Will Company A be entitled to an income tax deduction, under section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the implementation and on-going administration of the ESP Trust? | A2: Yes. | Q3: Will the irretrievable cash contributions made by Company A to the Trustee be deductible to Company A under section 8-1 of the ITAA 1997 at the time determined by section 83A-210 of the ITAA 1997 if the contributions are made before the acquisition of the relevant ESS interests? | A3: Yes. | Q4: Will the irretrievable cash contributions made by Company A to the Trustee to acquire shares in Company A be deductible to Company A under section 8-1 of the ITAA 1997 in the income year the contributions are made if the contributions are made after the acquisition of the relevant ESS interests? | A4: Yes. | Q5: If the Trustee satisfies its obligations in accordance with the ESP Trust Deed and the Company A Share Rights Plan by subscribing for new shares in Company A, will the subscription proceeds be included in the assessable income of Company A under sections 6-5 or 20-20 of the ITAA 1997 or trigger a CGT event under Division 104 of the ITAA 1997? | A5: No. | Q6: Will the Commissioner seek to make a determination that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies to deny, in part or full, a deduction claimed by Company A for the irretrievable cash contributions made by Company A to fund the subscription for, or acquisition on-market of, Company A's shares by the Trustee? | A6: No. The rulings for questions 1 to 6 inclusive each apply for the following periods: Income tax year ended 30 June 2016 Income tax year ended 30 June 2017 Income tax year ended 30 June 2018 Income tax year ended 30 June 2019 Income tax year ended 30 June 2020 | Q7: Will the irretrievable cash contributions made by Company A (or any subsidiary member of the Company A consolidated group) to the Trustee to fund the subscription for, or acquisition on-market of, Company A's shares, constitute a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)? | A7: No. | Q8: Will the provision of SRs or shares in Company A to employees of Company A under the Company A Share Rights Plan constitute a fringe benefit within the meaning of subsection 136(1) of the FBTAA? | A8: No. | Q9: Will the Commissioner seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A (or any subsidiary member of the Company A consolidated group) by the amount of the tax benefit gained from the irretrievable cash contributions made to the Trustee to fund the subscription for, or acquisition on-market of, Company A shares? | A9: No. The rulings for questions 7 to 9 inclusive each apply for the following periods: Fringe benefits tax year ended 31 March 2016 Fringe benefits tax year ended 31 March 2017 Fringe benefits tax year ended 31 March 2018 Fringe benefits tax year ended 31 March 2019 Fringe benefits tax year ended 31 March 2020

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company A is listed on the Australian Securities Exchange (ASX). In 20XX the Company A Share Plan was established to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership. Company A maintains a strong focus on the attraction, retention and motivation of staff to facilitate the continued growth of the company over the short to medium term. Fundamental to this growth strategy is the trust (ESP Trust) which was established on in 20XX by the Company A Share Plan Trust Deed (ESP Trust Deed) to administer the Company A Share Plan. Company A is likely to implement other equity plans in the future which would also likely be administered by the ESP Trust. Company A Share Plan The Company A Share Plan was implemented by the Company A Board in 20XX and is governed by the Company A Share Plan Rules (Rules) which provide for the grant of a right to an Eligible Employee, which is referred to as a Share Right (SR), for no cost or at a discount. The Rules contain the following clauses of relevance: • Clause A of the Rules defines an Eligible Employee as: • a full-time or part-time employee of any member of Company A or any subsidiary of Company A; or • a director of Company A or any subsidiary of Company A who holds a salaried employment or office with Company A or any subsidiary of Company A. • Clause B of the Rules states that the purpose of the Company A Share Plan is to: • assist in the reward, retention and motivation of Eligible Employees • link the reward of Eligible Employees to shareholder value creation; and • align the interests of Eligible Employees with shareholders by providing an opportunity for Eligible Employees to receive an equity interest in Company A in the form of SRs. • Clause C of the Rules states that the Company A Board may, at their discretion, determine that an Eligible Employee may participate in the Company A Share Plan. • Clause C(a) of the Rules states that once the Company A Board has determined that an Eligible Employee may participate in the Company A Share Plan they may make an invitation to the Eligible Employee. • Clause C(b) of the Rules states that an invitation to a Eligible Employee may be made on such terms and conditions as the Company A Board decides from time to time, including as to: • the number of SRs the Eligible Employee may apply for; • the Grant Date; • the amount payable (if any) for the grant of each SR or how such amount is calculated; • the Vesting Conditions (if any); • the Performance Hurdles (if any) and/or other conditions (if any); • whether the SRs will be: ♥ Equity Settled; ♥ Cash Settled ♥ A combination of Equity Settled and Cash Settled (in which case the Invitation may specific the relevant proportion); or ♥ Settled as determined by the Company A Board on or following the Performance Qualification Date and notified to the Participant in the Vesting Notice. • disposal restrictions attaching to the Plan Shares (if any); and • any other supplementary terms and conditions. • Clause D of the Rules states that an invitation to an Eligible Employee must be accompanied by an application form and any ancillary documentation (if any). • Clause E of the Rules states that the Company A Board may accept an application from an Eligible Employee in whole or in part but must not grant a SR to an Eligible Employee unless it has received a duly signed and completed application form with all applicable ancillary documentation. The application and ancillary documentation must include only the same terms and conditions specified in the invitation. • Clause F of the Rules states that on receipt of a duly completed and signed application Company A will, to the extent that the Company A Board has accepted such application, grant the relevant number of SRs, subject to the terms and conditions that were set out in the invitation, ancillary documentation and Rules. On being granted SRs the Eligible Employee becomes a Participant. • Clause G of the Rules states that a Participant does not have an interest (legal, equitable or otherwise) in any share of Company A which is the subject of a SR and is not entitled to notice of or to vote at a meeting of shareholders or to receive dividends declared by the company prior to the SR vesting and being exercised. • Clause H of the Rules states that the Company A Board will determine the Performance Hurdles and/or other conditions attaching to a SR prior to an invitation being made to an Eligible Employee. • Clause I of the Rules is about Performance Qualification: • sub-clause I(a) of the Rules states that the Company A Board may determine (acting reasonably) that the Performance Hurdles and/or other conditions attaching to a SR have been satisfied, or determine to waive the Performance Hurdles and/or other conditions. • sub-clause I(b) of the Rules states that a SR becomes Performance Qualified on the earlier of the date that: ♥ The Company A Board determines (acting reasonably) that the relevant Performance Hurdles and/or other conditions are satisfied; ♥ The Company A Board waives the relevant Performance Hurdles and/or other conditions; or ♥ The Performance Hurdles and/or other conditions are deemed to have been satisfied under the Rules. • sub-clause I(c) of the Rules states that the Performance Qualification Date of a SR is the date that the SR becomes Performance Qualified under sub-clause 6.2(b) of the Rules. • Clause J of the Rules states that a SR will be deemed to have vested if both: • the Performance Hurdles and/or other conditions applicable to the SR have been determined by the Company A Board (acting reasonably) to be satisfied, are waived by the Company A Board, or are deemed to have been satisfied under the Rules; and • Company A has issued a Vesting Notice to the Participant informing him or her that some or all of his or her SRs have vested. • Clause K of the Rules states that as soon as reasonably practicable after the Performance Qualification Date Company A will arrange to give a Vesting Notice to the Participant. • Clause L of the Rules states that a Participant will be deemed to have automatically exercised all Vested SRs that are the subject of a Vesting Notice referred to in clause K on the date of the relevant Vesting Notice. • Clause M of the Rules states that administration of the Company A Share Plan is vested in the Company A Board. ESP Trust Deed The purpose of the ESP Trust established by the ESP Trust Deed is to subscribe for newly issued shares, and/or acquire shares on-market, in Company A for delivery to Company A employees under the Rules. The ESP Trust Deed contains the following clauses of relevance: • Clause A of the ESP Trust Deed states that Company A must pay all expenses of the ESP Trust. • Clause B of the ESP Trust Deed is about Trustee acknowledgement: • sub-clause B(a) of the ESP Trust Deed states that the Trustee acknowledges that each Participant is absolutely entitled to any and all Allocated Plan Shares held by the Trustee and all other benefits and privileges attached to or result from holding the Allocated Plan Shares. • Sub-clause B(b) of the ESP Trust Deed states that the Trustee acknowledges that Company A may impose a holding lock on Allocated Plan Shares to ensure the compliance of a Participant with any restrictions as to the disposal or other dealing of the Allocated Plan Shares. • Clause C of the ESP Trust Deed states that the Plan Shares and other property of the ESP Trust will be vested in the Trustee upon trust on behalf of Participants on the terms and conditions set out in the ESP Trust Deed. • Clause D of the ESP Trust Deed states that subject to the ESP Trust Deed the Trustee has all of the powers in respect of the ESP Trust it is legally possible for a Trustee to have as though it were the absolute owner of the assets of the ESP Trust and acting in its personal capacity including, without limitation, the power to: • enter into and execute all agreement, deeds and documents; • enter into and give undertakings; • delegate powers and duties; • subscribe for, purchase or otherwise acquire and to sell or otherwise dispose of property, rights or privileges which the Trustee is authorised to acquire or dispose of on terms and conditions it thinks fit; • appoint and remove or suspend custodians, trustees, managers, servants and other agents, determine the powers and duties to be delegated to them, pay such remuneration to them as it thinks fit and any person so employed or engaged is deemed for the purpose of the deed to be employed or engaged by the Trustee; • institute, conduct, defend, compound or abandon any legal proceeding concerning the ESP Trust and settle or compromise and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Trustee in respect of the ESP Trust; • refer any claim or demand by or against the Trustee in respect of the ESP Trust to arbitration and observe and perform awards; • make and give receipts, releases and other discharges for money payable to the ESP Trust; • open bank accounts, retain on current or deposit account at any bank any money which it considers proper and make regulations for the operation of those bank accounts including the signing and endorsing of cheques; • take and act upon the advice or opinion of any legal practitioner, or other professional person and whether obtained by the Trustee or not, whether in relation to the interpretation of this deed, any other document or statute or the administration of the ESP Trust without being liable in respect of any act done or omitted to be done by it in accordance with such advice or opinion; • determine who is entitled to sign on the Trustee's behalf receipts, acceptances, endorsements, releases, agreements and documents; and • do all acts, matters or things which it may deem necessary or expedient for the purpose of giving effect to, and carrying out, the trusts, powers and discretions conferred on the Trustee by this deed or the law. • Clause E of the ESP Trust Deed is about Remuneration: • sub-clause E(a) of the ESP Trust Deed states that the Trustee is not entitled to receive from the ESP Trust any fees, commission or other remuneration in respect of its office (clause 5.13(a). • sub-clause E(b) of the ESP Trust Deed states that Company A must pay to the Plan Trustee, from the Company's own resources, such fees and reimburse such expenses incurred by the Trustee as the Company and Plan Trustee agree. • sub-clause E(c) of the ESP Trust Deed states that the Plan Trustee is entitled to retain for its own benefit any such fee or reimbursement. • Clause F of the ESP Trust Deed states that Company A and the Trustee agree that the ESP Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA 1997. • Clause G of the ESP Trust Deed states that Company A or a subsidiary of Company A may contribute money to the Trustee to fund the acquisition of Company A shares for the purposes of the Company A Share Plan and that the Trustee must not accept any contribution of money or money's worth from a Participant. • Clause H of the ESP Trust Deed is about Application of Funds: • sub-clause H(a) of the ESP Trust Deed states that for the purpose of enabling Company A to satisfy its obligations to allocate shares under the Company A Share Plan either at that time or in the future the Trustee must, if directed by the Company A Board, acquire Company A shares: in the ordinary course of trading on the market conducted by the ASX; by way of an off-market transaction; or through new shares issued by Company A. • sub-clause H(b) of the ESP Trust Deed states that the Company A Board must offer to have Company A or a subsidiary of Company A provide funds and/or request that the Trustee apply some of the capital of the ESP Trust to acquire shares in Company A. • sub-clause H(c) of the ESP Trust Deed states that nothing in clause H requires the Trustee to acquire shares in Company A if it does not receive sufficient payment from Company A or a subsidiary of Company A if it does not have sufficient funds to do so out of the property of the ESP Trust. • Clause I of the ESP Trust Deed is about Funding: • sub-clause I(a) of the ESP Trust Deed states that Company A or a subsidiary of Company A must provide the Trustee with any funds required by it in order to comply with its obligations under clause 6.2 (after application by the Trustee of any capital of the ESP Trust). • sub-clause I(b) of the ESP Trust Deed states that all funds received by the Trustee from Company A or a subsidiary of Company A will constitute accretions to the ESP Trust and will not be repaid to Company A or a subsidiary of Company A nor will any Participant be entitled to receive such funds. • sub-clause I(c) of the ESP Trust Deed states that funds received by the Trustee from Company A or a subsidiary of Company A may be paid to Company A where the Trustee subscribes for shares in Company A in accordance with the ESP Trust Deed, Rules or relevant terms of participation. • sub-clause I(d) of the ESP Trust Deed states that where an amount received by the Trustee from Company A or a subsidiary of Company A is in excess of the amount required by the Trustee to subscribe for, acquire, allocate or deliver shares Company A may require the Trustee to: ♥ apply the amount to subscribe for, acquire and/or allocate and deliver shares in accordance with the ESP Trust Deed, Rules or relevant terms of participation; or ♥ deposit the funds into any account opened and operated by the Trustee to be used for the purposes of acquiring and/or allocating and delivering shares in accordance with the ESP Trust Deed, Rules or relevant terms of participation • Clause J of the ESP Trust Deed is about Unallocated Plan Shares: • sub-clause J(a) of the ESP Trust Deed states that until Plan Shares are allocated to a Participant or transferred to a Participant the Trustee holds those Plan Shares on trust for the benefit of Participants generally from time to time in accordance with the terms and conditions of the ESP Trust Deed. • Clause K of the ESP Trust Deed is about the Allocation of Plan Shares: • sub-clause K(a) of the ESP Trust Deed states that on receipt of a direction by the Company A Board, the Trustee must allocate to any Participant nominated by the Company A Board the number of Company A shares specified by the Company A Board on the date specified by the Company A Board. • sub-clause K(b) of the ESP Trust Deed states that shares acquired in accordance with the ESP Trust Deed and allocated to a specified Participant must, subject to the relevant Rules, be: ♥ held by the Trustee on the terms and conditions of the ESP Trust Deed and on behalf of the relevant Participant who is the beneficial owner of the Plan Shares. ♥ allocated in the books of the Trustee to the relevant Participant. • sub-clause K(c) of the ESP Trust Deed states that all interests and benefits held by the Trustee on behalf of a Participant under the ESP Trust Deed are strictly personal to the Participant. • sub-clause K(d) of the ESP Trust Deed the Trustee must retain possession of the holdings statements of the Plan Shares. • Clause L of the ESP Trust Deed is about the Transfer of Plan Shares: • sub-clause L(a) of the ESP Trust Deed relevantly states that on receipt of a direction by the Company A Board to do so, the Trustee must transfer to any Participant nominated by the Company A Board the number of Plan Shares specified by the Company A Board on the date specified by the Company A Board. • sub-clause L(b) of the ESP Trust Deed relevantly states that upon Plan Shares being transferred to a Participant Company A will register the Participant as the holder of those Shares and the Participant will be absolutely legally and beneficially entitled to them. • Clause M of the ESP Trust Deed states that prior to termination of the ESP Trust capital to which no Participant would be entitled can be applied in payment of costs and expenses incurred by the Trustee or for specific benevolent options but cannot be repaid to Company A. • Clause N of the ESP Trust Deed states that when the ESP Trust terminates the Trustee must transfer Plan Shares as directed by Company A (but not for the benefit of Company A) and that the Trust terminates and must be wound up by the Trustee upon the first of the following events occurring: • an order being made or an effective resolution being passed for the winding up of Company A, other than for the purpose of amalgamation or reconstruction; • Company A determining that the ESP Trust is to be wound up; • should the ESP Trust be at any time subject to the rule of law against perpetuity, on the later of ♥ the date on which the ESP Trust becomes subject to the rule of law against perpetuity; and ♥ the day before the 80th anniversary of the ESP Trust Deed. • Clause O of the ESP Trust Deed states that the balance of the capital or income of the Trust to which no Participant is entitled must not be paid to Company A or a subsidiary of Company A but may be applied in whole or in part for the benefit of one or more of the following beneficiaries as the Trustee thinks fit: • an employee share or option trust established and maintained for the benefit of all or any employees of Company A or a subsidiary of Company A; or • any charity nominated by the Trustee. Reasons for establishing the ESP Trust Establishment of the ESP Trust provides Company A with greater flexibility to accommodate the long term incentive arrangements of the company. Similarly, it allows for a streamlined approach to the administration aspect of the Company A Share Plan. The ESP Trust can also be used to provide a range of incentives involving shares in Company A as circumstances change in the labour market that require different incentives to be provided in order to attract, reward and retain key employees. The commercial benefits of using the ESP Trust include: • assisting the Company A with its capital management, as Company A can direct the Trustee to use the contributions received to either acquire shares on-market, which will prevent the dilution of interests held by existing Shareholders, or alternatively to subscribe for new shares in Company A. • providing the opportunity of a price hedge. That is, shares can be acquired at a favourable price and held in the ESP Trust until needed. • allowing for greater flexibility to accommodate the long term incentive plans of Company A both now and into the future as the company continues to grow and expand its operations and as a result, its employee numbers. • providing a single vehicle for the administration of various plans and will assist Company A to comply with various plan rules. • providing an arm's-length vehicle through which shares in Company A can be acquired and held in the company on behalf of the relevant employee. This assists Company A to satisfy corporate law requirements relating to a company dealing in their own shares and to provide comfort to employees. • assisting with managing insider trading issues as the trustee, as an independent party, is acquiring shares in accordance with a set policy. • enabling easy recycling of Company A shares - when Company A shares are forfeited (i.e. due to the failure to meet vesting conditions) the forfeited Company A shares can be reused for future offers to employees. • providing a mechanism to warehouse Company A shares upfront until they are needed to satisfy future equity incentive awards (e.g. under an acquisition transaction the acquirer may set aside Company A shares for management to be later used for equity awards). Establishment costs and ongoing costs administering the ESP Trust Company A will incur costs in relation to the establishment and implementation of the ESP Trust, including the costs associated with applying for this private binding ruling. Company A will also incur further costs associated with the services provided by the Trustee of the ESP Trust in respect of the on-going administration and management of the ESP Trust, including, but not limited to: • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants); • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information to employees; • management of employee termination; and • other, Trustee expenses, including the annual audit of the financial statements and annual income tax return of the ESP Trust.

Relevant legislative provisions: Fringe Benefits Tax Assessment Act 1986 section 66 | Fringe Benefits Tax Assessment Act 1986 section 67 | Fringe Benefits Tax Assessment Act 1986 subsection 67(1) | Fringe Benefits Tax Assessment Act 1986 subsection 67(2) | Fringe Benefits Tax Assessment Act 1986 subsection 136(1) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(h) | Fringe Benefits Tax Assessment Act 1986 paragraph 136(1)(ha) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 subsection 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 6-5 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 subsection 8-1(2) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 Division 20 | Income Tax Assessment Act 1997 section 20-20 | Income Tax Assessment Act 1997 subsection 20-20(2) | Income Tax Assessment Act 1997 section 20-30 | Income Tax Assessment Act 1997 Division 83A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 subsection 83A-10(1) | Income Tax Assessment Act 1997 subsection 83A-10(2) | Income Tax Assessment Act 1997 Subdivision 83A-B | Income Tax Assessment Act 1997 Subdivision 83A-C | Income Tax Assessment Act 1997 section 83A-205 | Income Tax Assessment Act 1997 section 83A-210 | Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 paragraph 104-35(5)(c) | Income Tax Assessment Act 1997 paragraph 130-85(4) | Income Tax Assessment Act 1997 paragraph 130-85(4)(a) | Income Tax Assessment Act 1997 paragraph 130-85(4)(c) | Income Tax Assessment Act 1997 section 701-1 | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Questions 1 to 6 - application of the single entity rule in section 701-1: The consolidation provisions of the ITAA 1997 allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1 of the ITAA 1997 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 subsidiary members of the Company A tax consolidated group are treated for income tax purposes as having been undertaken by Company A as the Australian head company of the Company A tax consolidated group. | Detailed Reasoning - Questions 7 to 9: The SER in section 701-1 of the ITAA 1997 has no application to the FBTAA. Accordingly the Commissioner has provided a ruling to Company A and each subsidiary member of the Company A consolidated group in relation to questions 7 to 9. | Detailed Reasoning - Question 1: The general deduction provision is section 8-1 of the ITAA 1997 which states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Losses or outgoings The Trustee must, on direction by the Company A Board, acquire shares to enable Company A to satisfy its obligations under the terms of the Rules (clause H(a) of the ESP Trust Deed). This may occur at the time of direction, or at a future time (clause H(a) of the ESP Trust Deed). Company A must provide the Trustee with all the funds required to enable it to subscribe for, or acquire those shares (clause I(a) of the ESP Trust Deed). The Trustee is not required to acquire shares if it does not receive sufficient payment from Company A or a subsidiary of Company A or if it does not have sufficient funds to do so out of the property of the ESP Trust (clause H(c) of the ESP Trust Deed). The Trustee will hold Unallocated Shares on trust for the benefit of Participants generally (clause J(a) of the ESP Trust Deed). The Trustee will allocate or transfer those shares to particular Participants as directed by the Board in accordance with the ESP Trust Deed (clause L of the ESP Trust Deed). The contributions made to the Trustee by Company A will be irretrievable and non- refundable to Company A in accordance with the ESP Trust Deed as: • all funds received by the Trustee from Company A or a subsidiary of Company A will not be repaid to Company A or a subsidiary of Company A (clause I(b) of the ESP Trust Deed). • prior to termination of the ESP Trust capital to which no Participant would be entitled can be applied in payment of costs and expenses incurred by the Trustee or for specific benevolent options but cannot be repaid to Company A (M of the ESP Trust Deed). • on termination of the ESP Trust the Trustee must transfer Plan Shares as directed by Company A but not for the benefit of Company A (clause N of the ESP Trust Deed). • on termination of the ESP Trust the Trustee must not pay any balance of the capital or income of the Trust to which no Participant is entitled to Company A or a subsidiary of Company A (clause O of the ESP Trust Deed). Under the terms of the ESP Trust Deed contributions made to the Trustee of the ESP Trust by Company A will be irretrievable and will therefore be considered a loss or outgoing for the purpose of subsection 8-1(1) of the ITAA 1997. Sufficient nexus In order for a loss or outgoing to be deductible under subsection 8-1(1) of the ITAA 1997 it must be either incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. A line of authorities have established that there will be a link between a loss or outgoing and the derivation of income where there is a sufficient nexus ( The Herald and Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113; (1932) 2 ATD 169, Amalgamated Zinc (De Bavay's) Limited v The Federal Commissioner of Taxation (1935) 54 CLR 295;(1935) 3 ATD 288, W. Nevill And Company Limited v The Federal Commissioner of Taxation (1937) 56 CLR 290;4 ATD 187;(1937) 1 AITR 67, Ronpibon Tin No Liability v The Federal Commissioner of Taxation (1949) 78 CLR 47; 4 AITR 236; (1949) 8 ATD 431, Charles Moore & Co (W.A.) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344;(1956) 6 AITR 379; (1956) 11 ATD 147). The contributions made by Company A to the Trustee of the ESP Trust are part of the overall employee remuneration costs of Company A. The benefits provided to employees under the Company A Share Rights Plan are designed to reward, retain and motivate employees and to encourage participation by employees of Company A through share ownership. A sufficient nexus exists between the outgoings (being the irretrievable contributions made by Company A to the Trustee of the ESP Trust) and the derivation of assessable income for the purposes of subsection 8-1(1) of the ITAA 1997. Capital or revenue Company A will make contributions from time to time to the Trustee of the ESP Trust as and when ordinary shares in Company A are to be subscribed for or acquired pursuant to the Company A Share Rights Plan. In 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 the view is expressed that a company will be entitled to a deduction for irretrievable contributions made to the trustee of its employee share scheme under section 8-1 of the ITAA 1997. In Spotlight Stores Pty Ltd v Federal Commissioner of Taxation (2004) 55 ATR 745 and Pridecraft Pty Ltd v Federal Commissioner of Taxation (2004) 58 ATR 210 it was determined that payments by an employer company to an employee share trust established for the purpose of providing incentive payments to employees were on revenue account and were not capital or of a capital nature. | Detailed Reasoning - Apportionment: The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a different nature. This would be relevant in the circumstances where contributions made by Company A to the Trustee of the ESP Trust for the purposes of administering the Company A Share Rights Plan are used to subscribe for shares in Company A. A contribution to the trustee of an employee share trust is capital or of a capital nature where the contribution secures for the employer an asset or advantage of an enduring or lasting nature that is independent of the year to year benefits that the employer derives from a loyal and contented workforce. Where a contribution is, ultimately and in substance, applied by the trustee of an employee share trust to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature. Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required. In this case, the outgoings incurred by Company A by way of the irretrievable contributions it makes to the Trustee of the ESP Trust in order to carry on its business are either not capital in nature or any capital component is considered to be sufficiently small or trifling such that the Commissioner would not seek to apportion the deduction. Private or domestic in nature Nothing in the facts suggest that the irretrievable contributions made by Company A to the Trustee of the ESP Trust 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 1936 or ITAA 1997. | Detailed Reasoning - Conclusion: The irretrievable contributions Company A makes to the Trustee of the ESP Trust to fund the acquisition of ordinary shares in accordance with the ESP Trust Deed and Company A Share Rights Plan will be an allowable deduction to Company A under section 8-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Company A will incur costs in relation to the establishment and implementation of the ESP Trust, including the costs that are associated with applying for this private binding ruling. Company A will also incur further costs associated with the services provided by the Trustee of the ESP Trust in respect of the on-going administration and management of the ESP Trust, including, but not limited to: • costs incurred in the acquisition of shares on-market (e.g. brokerage costs and the allocation of shares to participants); • employee plan record keeping; • production and dispatch of holding statements to employees; • provision of annual income tax return information to employees; • management of employee termination; and • other Trustee expenses, including the annual audit of the financial statements and annual income tax return of the ESP Trust. In accordance with the ESP Trust Deed, the Trustee is not entitled to receive from the Trust any fees, commission or other remuneration in respect of its office (clause E(a) of the ESP Trust Deed). Company A must pay to the Trustee from Company A's own resources any such fees and reimburse such expenses incurred by the Trustee as agreed between Company A and the Trustee (clause E(b) of the ESP Trust Deed). The Trustee is entitled to retain for its own benefit any such fee or reimbursement (clause E(c) of the ESP Trust Deed). The costs incurred by Company A in relation to the implementation and on-going administration of the ESP Trust are deductible under section 8-1 of the ITAA 1997 as either: • costs incurred in gaining or producing the assessable income of Company A; or • costs necessarily incurred in carrying on the business of Company A for the purpose of gaining or producing the assessable income of Company A. The view that the costs incurred by Company A are deductible under section 8-1 of the ITAA 1997 is consistent with ATO ID 2014/42 Employer costs for the purpose of administering its employee share scheme are deductible in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Consistent with the analysis in Question 1, the costs are revenue and not capital in nature on the basis that they are regular and recurrent employment expenses. The costs are therefore not excluded from being deductible under paragraph 8-1(2)(a) of the ITAA 1997. Accordingly Company A is entitled to 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 ESP Trust. | Detailed Reasoning - Question 3: The deduction for the irretrievable cash contributions under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which Company A incurred the outgoing. However, under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997. 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 (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 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employee's employment and the contributions are made before the acquisition of the ESS interests. Arrangement The implementation of the Company A Share Rights Plan, establishment of the ESP Trust and provision of money by Company A to the Trustee, are considered as constituting an arrangement for the purpose of subparagraph 83A-210(a)(i) of the ITAA 1997. ESS interest 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. Under the Company A Share Rights Plan, a SR granted to a Participant is an ESS interest as it is a right to acquire a beneficial interest in a share in a company. Employee share scheme The term 'employee share scheme' is defined in subsection 83A-10(2) of the ITAA 1997 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) of the ITAA 1997, subsection 995-1(1) of the ITAA 1997 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 Company A Share Rights Plan is an employee share scheme for the purposes of Division 83A of the ITAA 1997 as it is an arrangement under which an ESS interest (i.e. a beneficial interest in a right to acquire a beneficial interest in a share), is provided to a Participant in relation to their employment in Company A in accordance with the ESP Trust Deed. A Company A share acquired by the Trustee to satisfy a SR granted under an employee share scheme, to an employee in relation to the employee's employment, is itself acquired under the same employee share scheme. Relevant connection The granting of SRs, the provision of irretrievable cash contributions to the Trustee under the arrangement, the acquisition and holding of the shares by the Trustee and the allocation of shares to Participants are all interrelated components of the Company A Share Rights Plan. All the components of the scheme, including the provision of irretrievable cash contributions to the Trustee must be carried out so that the scheme can operate as intended. As one of those components, the provision of money to the Trustee necessarily allows the scheme to proceed. Accordingly, the provision of money to the Trustee to acquire Company A shares is considered to be for the purpose of enabling Participants, indirectly as part of the Company A Share Rights Plan, to acquire SRs (that is ESS interests). Accordingly, if the irretrievable contributions are provided before SRs are acquired by a Participant, then section 83A-210 of the ITAA 1997 will apply to determine the timing of a deduction for the irretrievable contributions under section 8-1 of the ITAA 1997. In this instance the contribution will only be deductible to Company A in the income year when the relevant SRs (ESS interests) are granted to Participants. This is consistent with the ATO view expressed in ATO Interpretative Decision ATO ID 2010/103 Income Tax- Employee share scheme: timing of deduction for money provided to the trustee of an employee share trust . Indeterminate rights SRs acquired under the Company A Share Rights Plan are indeterminate rights for the purposes of section 83A-340 of the ITAA 1997. That is because they may be satisfied by either delivery of a share or payment of a cash equivalent at the discretion of the Company A Board. They are not considered to be a right to acquire a beneficial interest in a share unless and until the time when the proportion of the SRs that will be satisfied by the provision of shares is determined by the Company A Board. Once this proportion is determined, section 83A-340 of the ITAA 1997 operates to treat these SRs as though they had always been a right to acquire a beneficial interest in a share. If the money is provided to the Trustee before these SRs are acquired (and the SRs do subsequently become an ESS interest), then section 83A-340 of the ITAA 1997 operates to deem the SRs to always have been an ESS interest. Where this occurs, section 83A-210 of the ITAA 1997 will apply (retrospectively) to modify the timing of the deduction claimed under section 8-1 of the ITAA 1997. In such a case a deduction to fund the exercise of the SRs would be available to Company A in the income year in which the SRs were acquired by Participants. | Detailed Reasoning - Note: Where the SRs do not become an ESS interest because they are ultimately satisfied in cash, the outgoing should not flow through the ESP Trust. This is because the ESP Trust would not be satisfying the sole activities test for the purposes of subsection 130-85(4) of the ITAA 1997. | Detailed Reasoning - Question 4: As discussed in the analysis in Question 3, section 83A-210 of the ITAA 1997 will only apply if there is an arrangement under which there is a relevant connection between the irretrievable cash contributions provided to the Trustee and the acquisition of ESS interests (directly or indirectly) by an employee under an employee share scheme in relation to the employees employment and the contributions are made before the acquisition of the ESS interests. Accordingly, section 83A-210 of the ITAA 1997 will not apply where Company A makes irretrievable contributions to the Trustee to fund the acquisition of Company A shares to satisfy SRs, where the contribution is made after the acquisition of the relevant SRs. In such a situation, the irretrievable contributions by Company A to the Trustee will be deductible under section 8-1 of the ITAA 1997 in the income year in which the irretrievable contributions are made where SRs are ultimately satisfied with Company A shares. | Detailed Reasoning - Question 5: Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts, which is called ordinary income. The definition of 'income' was considered by Jordan CJ in Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215 at 219; 3 ATD 142 at 144-145 where his Honour said: The word "income" is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts… A leading case on ordinary income is Eisner v Macomber 252 US 189 (1919). It was said in that case that: The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. …Here we have the essential matter: not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being "derived" that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal; …that is income derived from property. Nothing else answers the description. In G.P. International Pipecoaters Proprietary Limited v The Commissioner of Taxation of the Commonwealth of Australia (1990) 170 CLR 124 the High Court of Australia held that whether a receipt is income or capital depends on its objective character in the hands of the recipient. Brennan, Dawson, Toohey, Gaudron and McHugh JJ stated at page 138 that: To determine whether a receipt is of an income or of a capital nature, various factors may be relevant. Sometimes, the character of receipts will be revealed most clearly by their periodicity, regularity or recurrence; sometimes, by the character of a right or thing disposed of in exchange for the receipt; sometimes, by the scope of the transaction, venture or business in or by reason of which money is received and by the recipient's purpose in engaging in the transaction, venture or business. Receipts of a capital nature do not constitute income according to ordinary concepts, whether or not incurred in carrying on a business. In an employee share scheme, 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 Company A from the Trustee can be determined by the character of the right or thing disposed of in exchange for the receipt. Under this arrangement, Company A is issuing the Trustee with a new share in itself. The character of the newly issued share is one of capital. Therefore, it can be concluded that the receipt, being the subscription proceeds, takes the character of share capital, and accordingly, is also of a capital nature. This view is supported by the reasoning in ATO ID 2010/155 Income Tax - Employee Share Scheme: assessability to an employer of the option exercise price paid by an employee. Accordingly, when Company A receives subscription proceeds from the Trustee of the ESP Trust where the Trustee has subscribed for new shares in Company A to satisfy obligations to Participants, that subscription price received by Company A is a capital receipt. That is, it will not be on revenue account and it not be ordinary income under section 6-5 of the ITAA 1997. Section 20-20 of the ITAA 1997 Subsection 20-20(2) of the ITAA 1997 provides that if you receive an amount as a recoupment of a loss or outgoing, it will be assessable income if you received it by way of insurance or indemnity and that amount can be deducted as a loss or outgoing in the current year or earlier income year. Company A will receive an amount for the subscription of shares by the Trustee of the ESP Trust. 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 in the current income year, or has been deductible or deducted in a previous income year, where the deduction was claimed under a provision in section 20-30 of the ITAA 1997. Subsection 20-25(1) of the ITAA 1997 defines a recoupment as including any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described and a grant in respect of the loss or outgoing. The Explanatory Memorandum to the Tax Law Improvement Bill 1997 states that the ordinary meaning of recoupment encompasses any type of compensation for a loss or outgoing. So far as a deduction under section 8-1 of the ITAA 1997 is allowed for bad debts or 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. The receipt by Company A is in return for issuing shares to the Trustee of the ESP Trust, not as a recoupment of previously deducted expenditure under section 8-1 of the ITAA 1997 regarding bad debts or rates and taxes that could be subject to section 20-30 of the ITAA 1997. The subscription proceeds will therefore not be an assessable recoupment under section 20-20 of the ITAA 1997. Capital Gains Tax (CGT) Section 102-20 of the ITAA 1997 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 A are CGT event D1 (creating a contractual or other rights) and CGT event H2 (receipt for event relating to a CGT asset). However, paragraph 104-35(5)(c) 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 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. As Company A is issuing shares, being equity interests as defined in section 974-75 of the ITAA 1997, to the Trustee of the ESP Trust neither CGT event D1 nor CGT H2 will happen. | Detailed Reasoning - Conclusion: When the Trustee of the ESP Trust satisfies its obligations under the ESP Trust Deed by subscribing for new shares in Company A, the subscription proceeds will not be included in the assessable income of Company A under section 6-5 of the ITAA 1997 or section 20-20 of the ITAA 1997 and will also not trigger a CGT event under Division 104 of the ITAA 1997. | Detailed Reasoning - Question 6: Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) deals with the application of the general anti-avoidance rules, including Part IVA of the ITAA 1936. Before the Commissioner can exercise his discretion to make a determination in respect of Part IVA under subsection 177F(1) of the ITAA 1936, three requirements must be met: 1. there must be a scheme within the meaning of section 177A of the ITAA 1936 2. a tax benefit must arise based on whether a tax effect would have occurred, or might reasonably be expected to have occurred, if the scheme had not been entered into or carried out, and 3. having regard to the matters in subsection 177D(2) of the ITAA 1936, the scheme is one to which Part IVA of the ITAA 1936 applies (dominant purpose). On the basis of an analysis of these requirements, the Commissioner will not seek to make a determination that Part IVA applies to deny, in part or in full, any deduction claimed by Company A in respect of the irretrievable contributions Company A will make to the Trustee to fund the subscription for or acquisition on-market of Company A shares by the ESP Trust. | Detailed Reasoning - Question 7: 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. The fringe benefits taxable amount is calculated under the FBTAA by reference to the taxable value of each fringe benefit provided. No amount will be subject to FBT unless a 'fringe benefit' is provided. In general terms 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition. Paragraph (ha) of the definition of 'fringe benefit' in subsection 136(1) of the FBTAA states that a fringe benefit does not include: (ha) a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997 ); Subsection 995-1(1) of the ITAA 1997 states that the expression an 'employee share trust' has the same meaning given by subsection 130-85(4) of the ITAA 1997. Subsection 130-85(4) of the ITAA 1997 states: An employee share trust , for an employee share scheme, is a trust whose sole activities are: (a) obtaining shares or rights in a company; and (b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of: (i) the company; or (ii) a subsidiary of the company; and (c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b). Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 The beneficial interest in a share received by a Participant when an ordinary share in Company A is granted to them under the terms of the ESP Trust Deed is an ESS interest within the meaning of subsection 83A-10(1) of the ITAA 1997. Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as being a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment. The Company A Share Rights Plan is an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because it is a scheme under which SRs are provided to employees in relation to the employee's employment. Company A has established the ESP Trust to acquire ordinary shares in Company A and to allocate those shares to employees in order to satisfy ESS interests (SRs) acquired by those employees under the Company A Share Rights Plan. The beneficial interest in the Company A share is itself provided under an employee share scheme because it is provided under the same scheme under which the SRs are provided to employees in relation to their employment. Paragraphs 130-85(4)(a) and (b) of the ITAA 1997 are therefore satisfied because: • the ESP Trust acquires shares in a company, namely Company A; and • the ESP Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the ESP Trust Deed and Company A Share Rights Plan. Paragraph 130-85(4)(c) of the ITAA 1997 Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will also require that the Trustee undertake incidental activities that are a function of managing the Company A Share Rights Plan. ATO Interpretative Decision ATO ID 2010/108 Income Tax - Employee share trust that acquires shares to satisfy rights provided under an employee share scheme and engages in other incidental activities sets out a number of activities which are merely incidental for the purposes of paragraph 130-85(4)(c) of the ITAA 1997: • the opening and operation of a bank account to facilitate the receipt and payment of money; • the receipt of dividends in respect of shares held by the trust on behalf of an employee, and their distribution to the employee; • the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme; • dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme; • the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares; • the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries; and • receiving and immediately distributing shares under a demerger. Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered to be merely incidental. The Trustee has, subject to the ESP Trust Deed, all of the powers in respect of the ESP Trust it is legally possible for a Trustee to have as though it were the absolute owner of the assets of the ESP Trust (clause D of the ESP Trust Deed). However, Company A and the Trustee have agreed that the ESP Trust will be managed and administered so that it satisfies the definition of "employee share trust" for the purpose of section 130-85(4) of the ITAA 1997 (clause F of the ESP Trust Deed). Paragraph 130-85(4)(c) of the ITAA 1997 is satisfied as all other activities undertaken by the Trustee are merely incidental to managing the Company A Share Rights Plan. | Detailed Reasoning - Conclusion: The ESP Trust satisfies the definition of an employee share trust in subsection 130-85(4) of the ITAA 1997 as: • the ESP Trust acquires shares in a company (being Company A); • the ESP Trust ensures that ESS interests (as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in the shares of Company A), are provided under an employee share scheme (as defined in subsection 83A-10(2) of the ITAA 1997) by allocating those shares to the employees in accordance with the ESP Trust Deed and Company A Share Rights Plan; and • the ESP Trust Deed does not provide for the Trustee to participate in any activities which are not considered to be merely incidental to a function of administering the ESP Trust. Consequently, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions by Company A to the Trustee from being a fringe benefit. Accordingly, the irretrievable cash contributions made by Company A to the Trustee, to fund the subscription for or acquisition on-market of Company A shares will not be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA. | Detailed Reasoning - Question 8: The provision of SRs Paragraph (h) of the definition of 'fringe benefit' relevantly states that a fringe benefit does not include: (h) a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83AB or 83AC of that Act applies. The Commissioner accepts that the Company A Share Rights Plan is an employee share scheme, that the SRs are ESS interests and that Subdivision 83A-B or 83A-C applies to those interests. Accordingly, the provision of SRs pursuant to the Company A Share Rights Plan will not be subject to fringe benefits tax on the basis that they are acquired by Participants under an employee share scheme (to which Subdivision 83A-B or 83A-C will apply) and are thereby excluded from being a fringe benefit by virtue of paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA. The provision of Company A shares In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. The meaning of the phrase 'in respect of' was considered by the Full Federal Court in J & G Knowles & Associates Pty Ltd v. Federal Commissioner of Taxation (2000) 96 FCR 402; 2000 ATC 4151; (2000) 44 ATR 22. Heerey, Merkel and Finkelstein JJ at page 410 stated: Whatever question is to be asked, it must be remembered that what must be established is whether there is a sufficient or material , rather than a , causal connection or relationship between the benefit and the employment. The situation is similar to that which existed in Federal Commissioner of Taxation v. McArdle 89 ATC 4051; (1988) 19 ATR 1901 where an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. Davies, Gummow and Lee JJ noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years. When an employee of Company A or its subsidiaries accepts an offer to participate in the Company A Share Rights Plan, they obtain a SR (being a right to acquire a beneficial interest in a share in Company A) and this SR constitutes an ESS interest. When this SR is subsequently exercised, any benefit received would be in respect of the exercise of the SR, and not in respect of employment (refer ATO Interpretative Decision ATO ID 2010/219 Fringe Benefits Tax Fringe benefit: shares provided to employees upon exercise of rights granted under an employee share scheme). Therefore, the benefit that arises to an employee upon the exercise of a vested SR (being the provision of a share in Company A) will not give rise to a fringe benefit as a benefit has not been provided in respect of the employment of the employee. | Detailed Reasoning - Question 9: As mentioned in the answer to question 6, PS LA 2005/24 has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains the operation of section 67 of the FBTAA. Notably, paragraphs 145 - 148 provide as follows: 145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA. 146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit. 147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose. 148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement: i. a benefit is provided to a person; ii. an amount is not included in the aggregate fringe benefits amount of the employer; and iii. that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into. The Commissioner would only seek to make a determination under section 67 of the FBTAA if the arrangement resulted in the payment of less fringe benefits tax than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 Fringe Benefits Tax-Response to questions by major rural organisation under the heading "Appendix, Question 18" where, on the application of section 67 of the FBTAA, the Commissioner states: …As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement... Further, paragraph 151 of Practice Statement 2005/24 states: 151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA. In the present case, the benefits provided to the Trustee by way of irretrievable contributions to the ESP Trust, and to Participants by way of the provision of SRs (and the Company A shares received on their vesting) under the Company A Share Rights Plan are excluded from the definition of a fringe benefit for the reasons given above in questions 7 and 8. As the benefits have been excluded from the definition of a fringe benefit the fringe benefits tax liability is not any less than it would have been but for the arrangement. The Commissioner will not seek to make a determination that section 67 of the FBTAA applies to increase the aggregate fringe benefits amount of Company A by the amount of the tax benefit gained from the irretrievable cash contributions made by Company A to the Trustee of the ESP Trust to fund the subscription for, or acquisition on-market of, shares in Company A.