Class Ruling

CR 2003/82

Income tax: Employee Share Scheme: Exempt Conditions: disposal of shares held under Jupiters Limited Exempt Employee Share Plan within three years of acquisition

This version is no longer current. Please follow this link to view the current version.

• Please note that the PDF version is the authorised version of this ruling.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

FOI status:

may be released

What this Class Ruling is about

1. This Ruling sets out the Commissioner's opinion on the way in which the 'tax law(s)' identified below apply to the defined class of persons, who take part in the arrangement to which this Ruling relates.

Tax law(s)

2. The tax law(s) dealt with in this Ruling are sections:

•

139B of the Income Tax Assessment Act 1936 ('ITAA 1936');

•

139BA of the ITAA 1936;

•

139CC of the ITAA 1936;

•

139CE of the ITAA 1936;

•

139E of the ITAA 1936;

•

139GF of the ITAA 1936;

•

130-80 of the Income Tax Assessment Act 1997 ('ITAA 1997').

Class of persons

3. The class of persons to whom this Ruling applies is employees of Jupiters Limited (Jupiters) and its related bodies corporate who participate in the Jupiters Limited Exempt Employee Share Plan (the Share Plan) as described in the arrangement part of this Ruling. They will be persons who may be compelled to dispose of their Jupiters ordinary shares to TABCORP Investments No.2 Pty Ltd (TABCORP Acquirer), a wholly-owned Related Entity of TABCORP Holdings Limited (TABCORP), as part of the Ordinary Share Scheme outlined below. In this Ruling, this class of persons is referred to as the 'participating employees'.

Qualifications

4. The Commissioner makes this Ruling based on the precise arrangement identified in this Ruling.

5. The class of persons defined in this Ruling may rely on its contents provided the arrangement actually carried out is carried out in accordance with the arrangement described in paragraphs 10 to 20.

6. If the arrangement actually carried out is materially different from the arrangement that is described in this Ruling, then:

•

this Ruling has no binding effect on the Commissioner because the arrangement entered into is not the arrangement on which the Commissioner has ruled; and

•

this Ruling may be withdrawn or modified.

7. This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to:

Commonwealth Copyright Administration

Intellectual Property Branch

Department of Communications, Information Technology and the Arts

GPO Box 2154

CANBERRA ACT 2601

or by e-mail to: commonwealth.copyright@dcita.gov.au

Date of effect

8. This Ruling applies to the year of income ended 30 June 2004. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of this Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Withdrawal

9. This Ruling is withdrawn and ceases to have effect after 30 June 2005. The Ruling continues to apply, in respect of the tax laws ruled upon, to all persons within the specified class who enter into the specified arrangement during the term of the Ruling. Thus, the Ruling continues to apply to those persons, even following its withdrawal, for arrangements entered into prior to withdrawal of the Ruling. This is subject to there being no change in the arrangement or in the persons' involvement in the arrangement.

Arrangement

10. The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description. The relevant documents or parts of documents incorporated into this description of arrangement are:

(a)

Class Ruling application dated 20 June 2003;

(b)

Amendment to Class Ruling application dated 24 July 2003;

(c)

Jupiters Limited Exempt Employee Share Plan Trust Deed (incorporating the Share Plan Rules);

(d)

Merger Implementation Agreement between TABCORP and Jupiters; and

(e)

Amendment Deed to Merger Implementation Agreement dated 4 September 2003.

The Share Plan

11. The Share Plan commenced on 2 October 2000. It provides an opportunity for eligible employees of Jupiters and its related bodies corporate (Jupiters Group) to acquire beneficial ownership of ordinary shares in Jupiters.

12. A Trust known as the Jupiters Exempt Employee Share Plan Trust was established by Jupiters and Australian Trustees Pty Ltd was appointed as the Plan Trustee. The Plan Trustee is the manager and administrator of the Share Plan.

13. From time to time, eligible employees are offered participation in the Share Plan and upon acceptance of the offer, the eligible employee becomes a Participant.

14. Jupiters ordinary shares acquired by the Plan Trustee for the benefit of a Participant are to be registered in the name of the Plan Trustee and allocated to that Participant. Participants are notified in writing by the Trustee when Shares are acquired.

15. Jupiters has two classes of shares on issue, being ordinary shares and reset preference shares (RPS). Only ordinary shares are acquired under the Share Plan. As at April 2003 ordinary shares held under the Share Plan accounted for approximately 0.25% of the total ordinary shares on issue.

16. Under the Plan Rules, Shares held by the Trustee for the benefit of a Participant must not be withdrawn from the Plan before 3 years after the date of acquisition of the shares on behalf of the Participant, excepting that a Participant may at any time withdraw from the Plan if the Participant is no longer employed by the Jupiters Group.

TABCORP takeover

17. TABCORP initiated a takeover of Jupiters through a merger proposal, whereby TAPCORP Acquirer will acquire all of the ordinary shares in Jupiters. A Merger Implementation Agreement (MIA) between the parties, as amended by Amendment Deed dated 4 September 2003, sets out the proposed terms of the merger. Two separate schemes of arrangement to be approved by the respective classes of Jupiters shareholders and the Court are proposed, namely:

•

an Ordinary Share Scheme

•

an RPS Scheme

Since only Jupiters ordinary shares are authorised for acquisition through the Share Plan, only the Ordinary Share Scheme is relevant to this Ruling.

18. Under the Ordinary Share Scheme, three options are available:

•

Option 1: Cash and Shares Alternative

•

Option 2: Maximum Cash Alternative

•

Option 3: Maximum Shares Alternative

A fully franked Special Dividend may also be made available subject to Jupiters obtaining two favourable rulings from the Australian Taxation Office (separate to this present request for class ruling on the Share Plan). Shareholders under the Ordinary Share Scheme may also receive consideration in relation to the divestment of Jupiters of its telephone and on-line sports betting business known as 'Centrebet'.

19. Where shareholder, Court and other regulatory approvals are obtained in respect of the Ordinary Share Scheme, TABCORP, through TABCORP Acquirer, will compulsorily acquire all Jupiters ordinary shares, including all employee shareholdings under the Share Plan. Barring unexpected delays, it is estimated that the merger will be completed by 13 November 2003.

Participation in the Ordinary Share Scheme by Share Plan shareholders

20. Consequent upon the approval of the Court of the Ordinary Share Scheme, and prior to the compulsory acquisition of all ordinary shares under the Scheme, Jupiters proposes to terminate the Share Plan. Under the Plan Rules, such termination will result in the participating employees becoming absolutely entitled to the shares held by the Plan Trustee on their behalf.

Ruling

Compulsory acquisition

21. Provided that the Share Plan rules are not varied to lift the restrictions referred to at paragraph 16 above, it would be concluded that the exemption conditions in section 139CE have been satisfied in relation to the ordinary shares acquired under the Share Plan, in that:

•

the Share Plan does not contain any conditions which allowed for shares acquired under the Plan to be forfeited;

•

the Share Plan has been operated so that shares held under the Plan would not be permitted to be withdrawn from the Plan and transferred to the employee Participants until three years after their acquisition, unless the participating employees ceased to be employed by the Jupiters Group; and

•

the Share Plan has been operated on a non-discriminatory basis in accordance with the terms of section 139GF.

22. Furthermore, the conclusion reached in the previous paragraph is not affected by the fact that shares acquired under the Share Plan may be compulsorily disposed of due to the operation of the Ordinary Share Scheme.

23. Accordingly, as the exemption conditions in section 139CE have been satisfied, section 139BA applies to the participating employees to ensure that the total amount of discounts, assessable to each employee in relation to the ordinary shares acquired under the Share Plan for each year of income, is only assessable under subsection 139B(2) to the extent that it is greater than $1,000.

24. In other words, termination of the Share Plan consequent upon the approval of the Court of the Ordinary Share Scheme will not mean the exemption conditions in Section 139CE are not satisfied in respect of Jupiters ordinary shares acquired under the Share Plan by persons to whom this ruling applies.

Disposal of shares as a result of an alteration to the Share Plan Rules

25. However, should the shares acquired under the Share Plan be disposed of within three years of acquisition, as a result of an alteration to the Plan Rules made by Jupiters (in contrast to the termination of the Share Plan as described in paragraph 20 above), the exemption condition in subsection 139CE(3) will not be satisfied.

26. In this case, as the exemption conditions in subsection 139CE(3) would not be satisfied, section 139BA would not apply to the participating employees for the relevant years of income. Thus the employees would be required under subsection 139B(2) to include in their assessable income for each year of income the total value of any discounts given. Existing assessments may be required to be amended where a participating employee had excluded an amount of discount given from their assessable income in a year of income.

Cost Base

27. Under subsection 130-80(2) of the ITAA 1997, the first element of the cost base or reduced cost base of each share that was acquired under the Share Plan is the market value of the share (worked out under either section 139FA or section 139FAA of the ITAA 1936) when it was acquired.

Explanation

28. A taxpayer who acquires shares under an employee share scheme is required by section 139B to include in his or her assessable income, in an income year, the value of the discount given in relation to each share acquired in that year. Where subsection 139B(2) applies to the discount, it is calculated under subsection 139CC(2) by deducting the amount of consideration paid or given for the share from the market value of the share at the time it was acquired.

Elections under section 139E

29. A taxpayer who acquires qualifying shares under an employee share scheme is able to make an election under subsection 139E(1) that subsection 139B(2) applies for a year of income to each qualifying share acquired by the taxpayer in that year.

30. Subsection 139E(2) requires that the election be made in writing in a form approved by the Commissioner before the taxpayer lodges his or her return of income for the year of income, or within such further time as the Commissioner requires.

The Exemption conditions

31. Section 139CE contains three exemption conditions:

•

The first exemption condition is that the scheme did not contain any conditions which could result in recipients forfeiting ownership of the shares that were acquired under the Share Plan (subsection 139CE(2);

•

The second exemption condition is that the scheme is operated so that no recipients would be permitted to dispose of shares acquired under the Share Plan until three years after the acquisition or until the recipient ceases to be an employee of the employer - whichever event occurs earlier (subsection 139CE(3)); and

•

The third exemption condition is that the employee share scheme and any financial assistance scheme in respect of the acquisition of shares under the employee share scheme is operated on a non-discriminatory basis (subsection 139CE(4)).

32. As the reference to 'the scheme' in subsections 139CE(2) to (4) is effectively a reference to the mechanism by which participating employees acquire qualifying shares, the exemption conditions initially must be satisfied at the time of the offer of shares to the employees. However, as part of the purpose of section 139CE is to ensure that qualifying shares are held for the nominated period in order to access the concession in section 139BA, satisfaction of the conditions at the time of offer, of itself, may not be enough. The Share Plan needs to continue to be operated in a manner that satisfies the exemption conditions.

Forfeiture of ownership

33. The Macquarie Dictionary (1997, Third Edition) defines 'forfeit' as 'something to which the right is lost by the commission of a crime or misdeed, the neglect of a duty, a breach of a contract etc.' The context in which 'forfeiting' is used in subsection 139CE(2) connotes a meaning somewhat broader than the legal definition - taking in a 'relinquishing', or a 'loss', without due recompense.

34. Sub-clause 4.7 of the Share Plan rules states that Plan Shares acquired for a Participant are registered in the name of the Plan Trustee and allocated to that Participant, and that the shares are identified in the books as being held on account of that Participant.

35. Sub-clause 4.14 indicates that subject to certain exceptions, each Participant possesses substantially the same rights as if that Participant was the legal owner of such shares.

36. Clause 11 of the Share Plan rules allows for the variation of Share Plan rules. Sub-clause 11.2 recognises that where Share Plan rules are varied in respect of Jupiters ordinary shares held prior to the date of amendment resulting in a possible reduction of the rights of participating employees, the written consent of three-quarters of the Participants affected must be obtained.

37. It is considered most unlikely that a three-quarters majority of Participating employees would consent in writing to relinquishing the Jupiters ordinary shares without due recompense, given that they contributed substantially to the cost in their acquisition under the Plan. As such, it is accepted that Shares acquired under the Share Plan are not subject to forfeiture in this circumstance. Furthermore, there are no other provisions within the Plan Rules that contemplate the reduction, or removal, of any entitlements of Participants in any circumstance.

38. Upon the approval of the Court to the Ordinary Share Scheme, all Jupiters ordinary shares will be compulsorily transferred, including employee shares. Employee Shares will be entitled to the same benefits and the same options as all other ordinary shares. Such identical entitlements preclude a finding that employee shares compulsorily acquired under the Ordinary Share Scheme would be regarded as being subject to forfeiture within the meaning of the first exemption condition in subsection 139CE(2).

39. As the Share Plan Rules do not contemplate 'forfeiture', and because compulsory acquisition would not see shares being 'forfeited', the exemption condition in subsection 139CE(2) has been satisfied.

Restrictions on disposal

40. Sub-clause 7.1 of the Plan Rules states that subject to sub-clause 7.4, Plan shares held by the Plan Trustee for the benefit of a Participant must not be withdrawn from the Plan before three years after the date of acquisition of the Shares on behalf of the Participant. Sub-clause 7.4 states that a Participant may at any time withdraw from the Plan if the Participant is no longer employed by the Company or any Associated Body Corporate.

41. As the legal owner and custodian of the Plan Shares, the Trustee ensures that Plan Shares are only withdrawn from the Plan in conformity with the aforementioned rules.

42. Since only 75% of the Ordinary shareholders at the Ordinary Scheme meeting is required to vote in favour of its going for Court approval, and shares held under the Share Plan account for only approximately 0.25% of total ordinary shareholding, the Trustee on behalf of the employee shareholders is in no position to prevent the Ordinary Scheme from being approved. Compulsory acquisition of all ordinary shares, including the employee shares, will occur following Court approval of the Ordinary Scheme. As such, compulsory acquisition under the Ordinary Scheme is beyond the control of both the Plan Trustee and the Participating employees.

43. Since the decision to vote in favour of the passage of the Ordinary Scheme to proceed for Court approval would be beyond the effective influence of those responsible for the operation of the Share Plan, it is concluded that the Share Plan has not been operated so that Participating employees would be permitted to dispose of shares under the Plan before the time specified in subsection 139CE(3). Accordingly, the exemption condition set out in that subsection has been satisfied.

44. However, the position would be different if the Plan Shares were disposed of within three years of acquisition, as a result of an alteration to the Share Plan rules by Jupiters.

45. Alteration of the Share Plan rules is within the direct control of Jupiters. Any alteration of the Share Plan rules to allow for the disposal of shares within three years of acquisition would not be regarded as operating the Share Plan in a manner that complies with the exemption condition in subsection 139CE(3).

46. Failure to meet the exemption condition in subsection 139CE(3) means that participating employees who have made elections under section 139E for a particular year of income will not be able to avail themselves of the $1,000 concession in section 139BA.

47. In these circumstances, employees who only included in their assessable income, for a particular year of income, that part of the total amount of discounts given that exceeded $1,000 will be required to amend their income tax returns for that year.

Non-discriminatory operation

48. Subsection 139CE(4) requires that the employee share scheme and any financial assistance in respect of the acquisition of the shares must be operated on a non discriminatory basis.

49. In order for an employee share scheme to have been operated on a non discriminatory basis, the conditions listed in subsection 139GF(2) must be satisfied in relation to all offers to acquire shares under the scheme. These conditions are that:

•

participation in the scheme is open to at least 75% of permanent employees;

•

the time for acceptance of offers made is reasonable; and

•

the essential features of each offer are the same for at least 75% of permanent employees.

50. The Share Plan has been operated on a non discriminatory basis. Sub-clause 4.5 of the Share Plan rules provides that '...All offers to Eligible Employees must be made on a non-discriminatory basis in accordance with section 139GF of the ITAA.'

Detailed contents list

51. Below is a detailed contents list for this Class Ruling:

Commissioner of Taxation
24 September 2003

Not previously issued in draft form.

References

ATO references:
NO 2003/12403

Related Rulings/Determinations:

CR 2001/1
TR 92/1
TR 97/16
TR 92/20

Subject References:
employee share scheme

Legislative References:
ITAA 1936 139B
ITAA 1936 139B(2)
ITAA 1936 139BA
ITAA 1936 139CC
ITAA 1936 139CC(2)
ITAA 1936 139CD
ITAA 1936 139CE
ITAA 1936 139CE(2)
ITAA 1936 139CE(3)
ITAA 1936 139CE(4)
ITAA 1936 139E
ITAA 1936 139E(1)
ITAA 1936 139E(2)
ITAA 1936 139FA
ITAA 1936 139FAA
ITAA 1936 139FF
ITAA 1936 139GF
ITAA 1936 139GF(2)
ITAA 1997 130-80
ITAA 1997 130-80(2)
Copyright Act 1968
TAA 1953 Part IVAAA