ESS: Indeterminate rights
Employee share scheme rules (ESS rules) that apply to shares, rights and stapled securities acquired from 1 July 2009 can also apply to indeterminate rights (that is, rights that later become rights to acquire shares). If an indeterminate right is acquired after 30 June 2009, the ESS rules apply as if the right had always been a right to acquire a share.
For example, a company may grant rights to acquire:
- shares with a specified total value, rather than a specified number of shares
- an indeterminate number of shares, the number being dependent on the share price at a time in the future
- either shares or cash (at the discretion of the employer).
These rights are known as indeterminate rights.
Indeterminate rights may become rights to acquire shares upon the occurrence of certain events, including:
- when shares are provided in satisfaction of the rights
- when the company makes a decision to satisfy the rights with shares
- when the number of shares that will be provided in satisfaction of the rights can be determined.
This information does not apply to rights acquired before 1 July 2009. To find out more, see:
Contractual rights that meet particular criteria are also indeterminate rights. For schemes entered into before 9 September 2015, you can choose not to treat those contractual rights as indeterminate rights, if it produces a more favourable outcome for you.
When is a contractual right an indeterminate right?
A contractual right is an indeterminate right if it later becomes a right to acquire a share as a direct result of a condition in the contract being satisfied.
You, the employee, must be able to enforce the contractual right, under the terms of the contract. Your right is considered enforceable even if you can only enforce performance of the condition. For example, if the condition is that your employer must obtain shareholder approval before issuing you with rights to acquire shares, you must be able to compel your employer to seek shareholder approval.
The condition may not need to be fulfilled by your employer; it may need to be fulfilled by you.
This also applies to rights that are transitioned into the current ESS rules.
When is a contractual right not an indeterminate right?
No direct connection
A contractual right is not an indeterminate right if that right does not become a right to acquire a share as a direct result of a condition in the contract being satisfied. This will occur where the connection between the contractual right and your acquisition of a right to acquire a share is distant; that is, the right to acquire a share cannot clearly be seen to have directly resulted from the initial right.
No existing contract
If meeting a condition results in the formation of a contract, rather than the performance of terms in an existing contract, the right is not an indeterminate right. For example, an employer may advise a prospective employee that they will draft an employment contract which includes a right to receive shares in the company, as long as the prospective employee commences work on a particular date. The condition relating to the commencement date is a condition precedent to the formation of the contract – and there is no indeterminate right at the time of the contract negotiation.
- TD 2016/D3 Income taxExternal Link: In what circumstances does a contractual right, which is subject to the satisfaction of a condition, become a right to acquire a beneficial interest in a share for the purposes of subsection 83A-340(1) of the Income Tax Assessment Act 1997?