• Examples

    The following examples assume that the 30-day rule will not apply and that the general conditions for deferral have been met.

    Example 1: Fixed period with holding lock

    Jack acquires shares under an ESS from his employer Pipeline Co., through a salary sacrifice arrangement. The salary sacrifice arrangement meets the conditions for tax deferral. Under the conditions of the scheme, Jack is not permitted to dispose of his shares until the earlier of:

    • five years from the time of acquisition, or
    • him ceasing employment with the company.

    Pipeline Co. put in place a holding lock to prevent employees from disposing of their shares within the five-year period, at the end of which time the shares are released.

    A genuine disposal restriction exists on Jack's shares. Jack is still employed with Pipeline Co. at the end of the five-year period. This is Jack's deferred taxing point.

    End of example

     

    Example 2: Fixed period with holding lock subject to release in special circumstances affecting the employer

    Using the first example, a condition of the ESS allows Pipeline Co. to release the holding lock in the following circumstances:

    • there is a change of control of Pipeline Co., or
    • if Pipeline Co. is an unlisted company, the shares in Pipeline Co. are listed on a recognised stock exchange.

    We still consider the scheme to genuinely restrict disposal.

    End of example

     

    Example 3: Fixed period with holding lock subject to release in special circumstances affecting the employee

    Using the first example, a condition of the ESS allows Pipeline Co. to release the holding lock for shares held by an employee in special circumstances, namely, if the employee

    • suffers serious injury or illness
    • suffers severe financial hardship, or
    • is affected by a natural disaster.

    We still consider the scheme to genuinely restrict disposal.

    End of example

     

    Example 4: Fixed period with holding lock subject to release in special circumstances under the policy and practice of the board

    Using the first example, a condition of the ESS allows Pipeline Co. to release the holding lock for shares held by an employee in circumstances determined at the discretion of the board. The board's policy and practice is to only release the holding lock in special circumstances, namely, if the employee:

    • suffers serious injury or illness
    • suffers severe financial hardship, or
    • is affected by a natural disaster.

    We still consider the scheme to genuinely restrict disposal.

    End of example

     

    Example 5: Fixed period with trust

    Justin works for Brick Co. and is granted rights to shares in Brick Co. under an ESS. The scheme does not permit disposal of the rights.

    The rights are subject to a real risk of forfeiture for a 12-month period. Under the conditions of the scheme, if the employee has not forfeited their rights, an employee share trust will allocate shares to the employee to satisfy their rights, at the end of the 12-month period. The employee cannot withdraw the shares from the trust or dispose of the shares for a further two-year period. At the end of the two-year period, the employee may withdraw the shares from the trust or request that the shares be sold on their behalf.

    Justin is still employed by Brick Co. at the end of the three years. At that time Justin no longer risks losing his rights and is no longer restricted from disposing of the shares acquired on exercise of the rights. This is Justin's deferred taxing point.

    End of example

     

    Example 6: Contractual restriction

    Rosemary acquires shares from her employer Apple Co., on 16 January 2010, under an ESS. Rosemary has a real risk of forfeiting those shares until 16 January 2011. Under the conditions of the scheme, Rosemary is prohibited from selling her shares until the company has been listed for two years. Apple Co. becomes a listed company on 10 May 2010.

    The conditions of the scheme provide that if the employees sell their shares before the company has been listed for two years, their employment will be terminated. Apple Co. strictly enforces this condition.

    This is a genuine disposal restriction, as the consequence of breaching the condition is serious and enforced. As long as Rosemary remains employed by Apple Co, her deferred taxing point is 10 May 2012, two years after the company was listed.

    End of example

     

    Example 7: Share trading policy

    Henry is an executive employee of Ludo Co. He acquires shares under an ESS from Ludo Co. on 30 May 2010. Those shares meet the conditions for deferral because they are subject to a real risk of forfeiture for a period of one year. Henry cannot dispose of his shares while they are subject to a real risk of forfeiture.

    Under the conditions of the scheme, Henry must also comply with Ludo Co.'s policies and procedures on share trading. Ludo Co.'s General Policy and Procedures document states that all executives are considered to have inside information about the company. For this reason, Ludo Co.'s executives are allowed to trade only during the month commencing the day after the release of the company's annual report. A breach of this policy will result in termination of employment or demotion.

    This is a genuine disposal restriction, as there are serious and enforced consequences for a breach of the policy.

    There is no longer a real risk of Henry forfeiting his shares on 31 May 2011. However, Henry is restricted from disposing of his shares until the month after the release of Ludo Co.'s 2011 annual report. The report is released on 30 September 2011. As Henry is still employed by Ludo Co at this time, Henry's deferred taxing point is 1 October 2011, as this is the first time Henry is able to dispose of the shares.

    End of example

     

    Example 8: Blackout periods

    Giles acquires rights from his employer Fine Fashion Co. under an ESS on 30 November 2010. The scheme does not permit disposal of the rights.

    Under the conditions of the scheme, the rights:

    • are subject to a real risk of forfeiture for a period of one year, and
    • can be exercised for a period of five years from the day following the end of the forfeiture period, subject to compliance with Fine Fashion Co.'s share trading policy.

    Under the policy, certain employees cannot exercise any rights acquired under an ESS in blackout periods. Giles is an employee covered by this policy. The blackout periods commence on the first day of the last month in the half year (1 December) and full year (1 June) and end on release of the half year or full year financial results (10 February and 10 August). Shares acquired on exercise of rights are not subject to disposal restrictions.

    Giles is no longer subject to a real risk of forfeiture on 1 December 2011. As this is in a blackout period under the scheme, Giles is genuinely restricted from exercising his rights. As Giles is still employed by Fine Fashion Co at this time, the deferred taxing point is the first time that Giles is able to exercise his rights and receive the unrestricted shares, that is, 11 February 2012.

    End of example

     

    Example 9: Trading windows

    Jennifer acquires rights from her employer Toys Co. on 29 October 2010 under an ESS. The scheme does not permit disposal of the rights.

    The rights are subject to a real risk of forfeiture for a period of one year and can be exercised from the day following that one-year period. The rights will expire three years from acquisition. A contractual condition of the ESS restricts disposal of the shares resulting from the exercise of the rights for two years after exercise. However, the scheme also provides two trading windows during the restriction period: one on 30 October 2011 and one on 30 October 2012. On those dates, the disposal restrictions are lifted for a period of 30 working days.

    There are serious and enforced consequences for disposing of the shares outside of the two trading windows.

    Jennifer no longer has a real risk of losing her rights on 30 October 2011. On that day she is no longer restricted from exercising her rights. That day is also the first day of a trading window, so she is not restricted from disposing of the shares acquired on exercise of the rights.

    The deferred taxing point occurs on 30 October 2011, if Jennifer is still employed by Toys Co. at that time. This is the first time that Jennifer can take action to realise the benefit (whether or not Jennifer chooses to exercise the rights at this time).

    If Jennifer acquires her rights after 30 June 2015, the date she could take action to realise the benefit would not have been her deferred taxing point unless she had exercised her rights at or before that time.

    For example, if Jennifer acquires her rights on 29 October 2015, exercises those rights on 10 January 2017 and if the two trading windows are on 30 October 2016 and 30 October 2017, then her deferred taxing point would be 30 October 2017. That is the first time after she exercises the rights that she can take action to dispose of the shares.

    End of example

     

    Example 10: No fixed period with request for release of shares routinely approved

    Sarah acquires shares in Clothing Co. under an ESS. Under the conditions of the scheme, an employee share trust allocates the shares to Sarah and holds the shares for her benefit subject to forfeiture conditions. The shares are subject to a real risk of forfeiture for a period of three years.

    Sarah cannot dispose of the shares until a delegate of the board approves a request for withdrawal of the shares from the employee share trust. The board will routinely approve the withdrawal of the shares after the forfeiture period has passed.

    Sarah no longer has a real risk of forfeiting her shares at the end of the three year forfeiture period. We consider that Sarah is not genuinely restricted from disposing of her shares at this time because she can request that the delegate of the board approve withdrawal of the shares and such a request is routinely approved. As Sarah is still employed with Clothing Co. this will be her deferred taxing point.

    End of example

     

    Example 11: Insider trading policy that requires Board approval

    Boots Co. provides its employees with rights to acquire Boots Co. shares under an ESS in April 2010. The scheme does not permit disposal of the rights.

    The rights are subject to a real risk of forfeiture for a three year period. If the rights are not forfeited, shares are transferred to the employee in satisfaction of the rights at the end of the three year period.

    Under the conditions of the scheme, employees are required to comply with the share trading policy of Boots Co. for shares acquired in satisfaction of the rights.

    Some employees are considered likely to be routinely in possession of inside information (restricted employees). As such, they are prohibited by the company's share trading policy from dealing in Boots Co. shares unless they are cleared to deal by a delegate of the board of directors. These employees are required to state in writing, at the time of making a request to deal in their shares, that they are not in possession of inside information. The delegate will approve a request if they are satisfied that the employee is not in possession of inside information. There are serious and enforced consequences for disposing of the shares without obtaining approval.

    Louise is a restricted employee covered by the share trading policy.

    a. If, when Louise receives the shares in satisfaction of the rights, she has:

    • possession of inside information, and
    • records that provide evidence that she possesses this information,

    we consider Louise to be genuinely restricted from disposing of her shares, on the basis that she is unable to obtain the delegate's approval to trade.

    b. If, when Louise receives the shares in satisfaction of the rights, she does not have possession of inside information, we do not consider Louise to be genuinely restricted from disposing of her shares. She can take action at that time to realise the benefit by requesting the delegate's approval to trade. This will be her deferred taxing point.

    c. If, within 10 business days (for example) from receiving the shares in satisfaction of the rights, Louise makes a request and the delegate refuses that request, we will consider Louise to have always been restricted from disposing of the shares and that her deferred taxing point has not occurred. Her deferred taxing point will occur when she no longer has possession of inside information at which time she can make another request (unless within 10 business days of being able to make the request, she makes the request and that request is refused).

    Boots Co. employer reporting obligations are explained in example 12.

    End of example

     

    Example 12: Employer reporting - insider trading policy requires board approval

    Boots Co. operates a tax-deferred scheme. Boots Co. must give an ESS statement to its employees and an ESS annual report to the ATO for the income year in which the deferred taxing point for the rights occurs. For reporting purposes, Boots Co. needs to take reasonable steps to identify accurately when the deferred taxing point arises.

    In April 2013, employees receive shares in satisfaction of rights.

    A deferred taxing point will occur when the shares are transferred to Boots Co. employees, unless an employee is a restricted employee that:

    • is in possession of inside information and has records that provide evidence of having that information, or
    • within 10 business days of receiving the shares in satisfaction of the rights, has made a request to trade and that request has been refused by the delegate.

    For the 2012-13 income year, Boots Co. will report in the following way:

    • Boots Co. provides an ESS statement to all employees that are not restricted employees
    • Boots Co. provides an ESS statement to all restricted employees, unless the restricted employee
      • has advised the company that they have possession of inside information, or
      • has submitted a request to trade which was refused within 10 business days of receiving the shares
       
    • Boots Co. provides an ESS annual report to the ATO for all employees who received an ESS statement.

    For those restricted employees that Boots Co. does not report in the 2012-13 income year:

    • Boots Co. requires the restricted employees to advise when they are no longer in possession of inside information and Boots Co. will record this date as the deferred taxing point
    • Boots Co. advises the employees that Boots Co. will report on the basis that a deferred taxing point will have occurred at the beginning of the next financial quarter, unless the employee
      • advises them that they are still in possession of inside information, or
      • makes a request to trade and that request is refused within 10 business days of the beginning of the next financial quarter.

    Boots Co. continues to report on this basis.

    When Louise receives her shares in April 2013, she has inside information. Louise advises the company that she has inside information. On that basis, Boots Co. does not provide an ESS statement to Louise and does not include information about Louise in the ESS annual report for the 2012-13 income year.

    At the beginning of July and October 2013, Louise advises Boots Co. that she still holds inside information. Louise continues to hold inside information until November 2013. Louise then advises Boots Co. that she is no longer in possession of inside information. Louise decides not to request approval to trade.

    Boots Co. records Louise's deferred taxing point as the date that she ceased to hold inside information, and for the 2013-14 income year, provides an ESS statement to Louise by 14 July 2014 and an ESS annual report to the ATO by 14 August 2014.

    End of example
      Last modified: 01 Jul 2015QC 27241