ATO Interpretative Decision
ATO ID 2009/85
Income Tax
Employee Share Scheme: rights to acquire shares at a future time authorised by shareholdersThis ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where shareholders at the Annual General Meeting (AGM) of a company authorise the company to grant in the future, to an employee, a right to acquire a share in the company, when is the right acquired by the employee for the purposes of Division 13A of Part III (Division 13A) of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
A right to acquire a share will be acquired by the employee for the purposes of Division 13A of the ITAA 1936, when following authorisation by shareholders at the AGM, the company enters into a contract with the employee to grant a right to acquire a share in the company.
Facts
An employee is an executive of a public company.
A resolution is put to shareholders at the AGM to authorise the company to grant rights to acquire shares in the company to the employee.
The resolution put to shareholders is approved at the AGM.
The company subsequently entered into a contract with the employee to grant the employee rights to acquire shares in the company.
The rights to acquire shares are rights acquired under an employee share scheme for the purposes of Division 13A of the ITAA 1936.
Reasons for Decision
Section 139G of the ITAA 1936 provides that an employee acquires a right for the purposes of Division 13A of the ITAA 1936 in various circumstances including the time when another person creates a right (being a right to acquire a share) in the employee.
When the shareholders at the AGM approved the resolution to allow the company at some time in the future, to grant rights to acquire shares in the company to the employee, no contractual obligations were created between the company and the employee at that time. Therefore, the resolution did not create a right in the employee within the meaning of section 139G of the ITAA 1936.
However, when the company subsequently entered into a contract with the employee to grant rights to acquire shares in the company, a right (to acquire a share) was created in the employee within the meaning of section 139G of the ITAA 1936.
Therefore, a right to acquire a share was acquired by the employee under an employee share scheme for the purposes of Division 13A of the ITAA 1936 when the company entered into a contract with the employee to grant a right to acquire a share in the company.
Date of decision: 24 July 2009Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1936
Division 13A of Part III
section 139G
ATO ID 2007/66
Keywords
Employee share schemes & options
Date reviewed: 19 December 2017
ISSN: 1445-2782