Class Ruling

CR 2004/61

Income tax: Employee Share Scheme: Fantastic Holdings Limited Employee Share Reward Plan

• Please note that the PDF version is the authorised version of this ruling.

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 laws dealt with in this Ruling are sections:

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

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139BA of the ITAA 1936;

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139C of the ITAA 1936;

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139CA of the ITAA 1936;

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139CC of the ITAA 1936;

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139CD of the ITAA 1936;

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139CE of the ITAA 1936;

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139E of the ITAA 1936;

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139FA of the ITAA 1936;

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139FB of the ITAA 1936;

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139G of the ITAA 1936;

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139GF of the ITAA 1936;

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130-80 of the Income Tax Assessment Act 1997 (ITAA 1997); and

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130-83 of the ITAA 1997.

Class of persons

3. The class of persons to whom this Ruling applies are the Australian resident employees of the Fantastic Holdings Group (the Fantastic group) who participate in the Fantastic Holdings Limited Employee Share Reward Plan (ESRP) as described in the Arrangement part of this Ruling.

4. The Fantastic group comprises Fantastic Holdings Limited (Fantastic), Fantastic Furniture Pty Ltd, Fantastic Metal Furniture Pty Ltd, Fantastic Furniture Licensing Pty Ltd and Best Buy Pty Ltd.

Qualifications

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

6. 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 at paragraphs 10 to 16 in this Ruling.

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

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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

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this Ruling may be withdrawn or modified.

8. 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

Department of Communications, Information Technology and the Arts

GPO Box 2154

CANBERRA ACT 2601

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

Date of effect

9. This Ruling applies from the 2001-02 year of income. 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 issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20). Furthermore, the Ruling only applies to the extent that:

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it is not later withdrawn by notice in the Gazette;

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it is not taken to be withdrawn by an inconsistent later public ruling; or

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the relevant tax laws are not amended

Arrangement

10. The arrangement that is the subject of the Ruling is described below. This description is based on the following documents:

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Class Ruling application dated 15 April 2003;

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the Fantastic Holding Limited's ESRP Rules;

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employee booklet covering the offer made for the year ended 30 June 2002; and

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an e-mail from Felsers (Fantastic's representatives) dated 19 August 2003 confirming how specified parts of the ESRP are operated.

These documents, or relevant parts of them, as the case may be, form part of and are to be read with this description.

Note: certain information received has been provided on a commercial-in-confidence basis and will not be disclosed or released under the Freedom of Information Legislation.

11. The ESRP was established to assist in retaining and motivating employees of the Fantastic group. The board of directors of Fantastic (the board) are responsible for the administration of the ESRP in accordance with the ESRP rules.

12. The ESRP is a broadly based scheme available to all Australian full-time and permanent part-time employees (eligible employees) that meet a minimum 12 months service requirement. Ninety percent of all employees are full time or permanent part-time employees, therefore at least seventy five percent of permanent employees are entitled to participate in the ESRP.

13. The board may invite all eligible employees of the Fantastic group to acquire fully paid ordinary shares in Fantastic for no consideration and under the same terms. The Class Ruling application states that 'A reasonable time is provided to accept any offer made'. Employees have taken up shares under the ESRP in the last offer made to all eligible employees in June 2002.

14. Within 20 business days of receiving an application form from an eligible employee, Fantastic must issue the shares specified in the application form. Shares cannot be issued to relatives or associates and are registered in the name of the employee (participating employee).

15. A participating employee cannot sell or transfer the shares within 3 years of the issue date unless they cease to be an employee of the Fantastic group. Whilst the disposal restriction is in place a participating employee is entitled to receive all dividends and other entitlements on their shares and to exercise all voting rights attached to their shares. Under the ESRP there are no rules or other conditions that can result in forfeiture of shares acquired under the scheme.

16. The ESRP rules stipulate that no participating employee is allowed to obtain shares under the plan if it will result in them holding a legal or beneficial interest in more than 5% of the shares in Fantastic or puts them in a position to vote or control the voting of more than 5% of the shares in Fantastic.

Ruling

All references are to the Income Tax Assessment Act 1936 unless otherwise specified

17. Where a participating employee acquires shares under the ESRP they are qualifying shares for the purposes of section 139CD.

Where an employee makes an election

18. Where a participating employee makes an election under section 139E, the discount on the shares will be included in their assessable income in the year of income in which the shares are acquired, pursuant to subsection 139B(2).

19. The discount to be included in the employee's assessable income is equivalent to the market value of the shares at the time they are acquired. The market value of a share at this time is determined under section 139FA. As the exemption conditions in section 139CE have been satisfied only the amount of the discount greater than $1,000 is included in assessable income.

20. Under subsection 130-80(2) of the ITAA 1997, the first element of the cost base or reduced cost base of each share that is acquired under the ESRP is the market value of the share at the time it is acquired.

Where an employee does not make an election

21. Where a participating employee does not make an election under section 139E, the discount on the shares will be included in their assessable income in the year of income in which the cessation time occurs, pursuant to subsection 139B(3).

22. The cessation time will be the earliest of:

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the time when the employee disposes of the shares;

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the time when any restriction preventing the employee from disposing of the shares ceases to have effect;

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the time when the employee ceases employment with their employer or a company in the Fantastic group;

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the end of the 10 year period starting when the employee acquired the shares.

Disposal within 30 Days

23. Where the employee disposes of the shares in an arm's length transaction within 30 days of the cessation time, the discount assessable at the cessation time will be the amount of consideration received on the disposal of the shares in accordance with subsection 139CC(3).

24. Any capital gain or capital loss made as a consequence of such a disposal will be disregarded.

Disposal after 30 Days

25. Where the shares are not disposed of by the employee in an arm's length transaction or within 30 days of the cessation time, the discount will be the market value of the share at the cessation time in accordance with subsection 139CC(4).

26. The first element of the cost base or reduced cost base of the shares upon a CGT event occurring will be their market value at the cessation time.

Explanation

27. For Division 13A to apply to shares acquired under the ESRP, a share must be acquired under an employee share scheme as defined in section 139C.

28. Section 139G provides that a person acquires a share in several circumstances, including by having a share allotted to them by another person. A participating employee acquires a share when it is issued to them by the board in accordance with the ESRP rules.

29. Subsection 139C(1) provides that a share is acquired under an employee share scheme if the share is acquired in respect of, or in relation directly or indirectly to, any employment of the taxpayer. This condition is satisfied with respect to shares acquired by participating employees under the ESRP.

30. Subsection 139C(3) provides that a share is not acquired under an employee share scheme unless it is acquired for less than its market value. This condition is satisfied under the ESRP as participating employees are not required to make any payment to acquire the shares.

31. Therefore, participating employees acquire shares under an employee share scheme within the meaning in section 139C, as the shares are acquired by them for less than market value and in respect of or in relation to their employment.

32. Where an employee acquires shares under an employee share scheme the discount given is included in assessable income in accordance with section 139B.

33. The time at which the discount is included in the participating employee's assessable income depends on two material factors. The first is whether the shares are 'qualifying shares' within the meaning of that term in section 139CD. The second is whether the employee has made an election under section 139E to include the discount in assessable income in the year the shares are acquired.

34. A share is a qualifying share for the purposes of Division 13A if it meets the six conditions specified in section 139CD. Shares acquired under the ESRP are qualifying shares because:

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they are acquired under an employee share scheme;

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the share is a share in a company which is the employer or the holding company of the employer of the participating employee;

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the shares are ordinary shares;

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at least 75% of the permanent employees of the employer have been eligible to acquire shares under the ESRP;

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the restriction on ownership not exceeding 5% is complied with; and

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the restriction on voting power not exceeding 5% is complied with.

Where an employee makes an election

35. An employee can elect under section 139E that subsection 139B(2) applies for a year of income. The election will apply to each qualifying share acquired by the employee in the year of income. Subsection 139B(2) provides that the discount on a share is included in the taxpayer's assessable income in the year of acquisition of the share, that is, in the year when Fantastic issued the share to the employee.

36. The amount of the discount to be included in assessable income is calculated in accordance with subsection 139CC(2). As the employee does not provide any consideration for the acquisition of the share the discount is equivalent to the market value of the share, at the time it was acquired by the employee.

37. Subdivision F contains special provisions to determine the market value of shares on a particular day. As the ordinary shares in Fantastic are listed on the Australian Stock Exchange (ASX), section 139FA provides that their market value is:

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if there was at least one transaction on the ASX in those shares in the week up to and including the date of acquisition - the weighted average of the prices at which those shares were traded on the ASX during that week; or

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if there were no such transactions in the week up to and including the date of acquisition - the last price at which an offer was made on the ASX in that period to buy such a share, or if no offer was made, the value as determined under section 139FB.

$1,000 reduction in discount

38. Section 139CE contains exemption conditions that must be satisfied by the ESRP, for the participating employees to have access to the $1,000 tax free threshold provided for in subsection 139BA(2). The exemption conditions are:

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the scheme does not contain any conditions which could result in an employee forfeiting ownership of any shares that were acquired under the scheme;

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the scheme is operated so that no employee is permitted to dispose of shares acquired under the scheme until the earlier of:

(a)

three years after their acquisition; or

(b)

the time when the employee is no longer employed within the Fantastic group or by the same employer as at the time the shares were acquired; and

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the scheme is operated on a non-discriminatory basis as set out in section 139GF.

39. The ESRP as outlined satisfies the forfeiture and disposal restrictions referred to in paragraph 38. Additionally the ESRP is operated on a non-discriminatory basis as the conditions in section 139GF are satisfied because all offers to acquire shares:

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are made to at least 75% of permanent employees;

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provide a reasonable time to accept an offer; and

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are made on the basis that the essential features of each offer will be the same for at least 75% of permanent employees.

40. As all the exemption conditions in section 139CE have been satisfied, subsection 139BA(2) will apply so that only the discount greater than $1,000 will be included in a participating employee's assessable income.

41. The first element of the cost base of the shares for the purposes of the CGT provisions will be determined in accordance with subsection 130-80(2) of the ITAA 1997. In this case it is the market value of the share determined by the operation of sections 139FA to 139FF.

Where an employee does not make an election

42. As the shares are qualifying shares, where a participating employee has not made an election under section 139E, the discount in relation to the shares will be included in assessable income in the year in which cessation time occurs, pursuant to subsection 139B(3). As the shares acquired under the plan are prohibited from disposal for the first 3 years after acquisition, subsection 139CA(2) will determine when cessation time occurs.

43. Under the ESRP, cessation time will be the earliest time when:

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the shares are disposed of;

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any restriction preventing the taxpayer from disposing of the share, ceases; or

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employment with the Fantastic group or by the same employer as at the time the shares were acquired, ceases.

Disposal within 30 days of cessation time

44. Subsection 139CC(3) determines the amount of the discount to be included in the employee's assessable income where the shares are disposed of by the employee in an arm's length transaction within 30 days of the cessation time. As no consideration is given by the employee for the shares, the entire proceeds received by the employee on disposal will be the discount to be included in assessable income.

45. As the shares are qualifying shares and no election is made under section 139E for the year of income that the shares were acquired, a capital gain or loss made on disposal will be disregarded in accordance with subsection 130-83(2) of the ITAA 1997.

No disposal within 30 days of cessation time

46. Subsection 139CC(4) determines the amount of the discount to be included in the employee's assessable income where the shares are not disposed of by the employee in an arm's length transaction within 30 days of the cessation time. As no consideration is given by the employee for the shares, the discount to be included is the market value of the shares at cessation time.

47. As the shares in Fantastic are listed on the ASX the market value of the shares for the purposes of paragraph 139CC(4)(a) will be determined in accordance with section 139FA (see paragraph 37).

48. The cost base of the shares for the purposes of the CGT provisions will be determined in accordance with subsection 130-83(3) of the ITAA 1997, the first element being the market value of the shares worked out under section 139FA at cessation time.

Detailed contents list

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

Commissioner of Taxation
16 June 2004

Not previously released as a draft.

References

ATO references:
NO 2004/7433

Related Rulings/Determinations:

TR 92/1
TR 92/20
TR 97/16
CR 2001/1

Subject References:
Employee Share Schemes

Legislative References:
ITAA 1936 139B
ITAA 1936 139B(2)
ITAA 1936 139B(3)
ITAA 1936 139BA
ITAA 1936 139BA(2)
ITAA 1936 139C
ITAA 1936 139C(1)
ITAA 1936 139C(3)
ITAA 1936 139CA
ITAA 1936 139CA(2)
ITAA 1936 139CC
ITAA 1936 139CC(2)
ITAA 1936 139CC(3)
ITAA 1936 139CC(4)
ITAA 1936 139CC(4)(a)
ITAA 1936 139CD
ITAA 1936 139CE
ITAA 1936 139E
ITAA 1936 139FA
ITAA 1936 139FB
ITAA 1936 139FF
ITAA 1936 139G
ITAA 1936 139GF
ITAA 1997 130-80
ITAA 1997 130-80(2)
ITAA 1997 130-83
ITAA 1997 130-83(2)
ITAA 1997 130-83(3)
TAA 1953 Pt IVAAA
Copyright Act 1968