Edited version of private ruling

Authorisation Number: 1011553870588

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Ruling

Subject: Employee share scheme - real risk of forfeiture

Issue 1

Is the employee share scheme a deferred scheme due to the operation of paragraph 83A-105(3)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

Period ending 30 June 2011

Period ending 30 June 2012

Period ending 30 June 2013

Period ending 30 June 2014

Period ending 30 June 2015

Period ending 30 June 2016

The scheme commenced on:

1 July 2010

Issue 2

To the extent that the shares are subject to a real risk of forfeiture and a subsequent deferral of the taxing point, will Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deny deferral?

No.

This ruling applies for the following periods:

Period ending 30 June 2011

Period ending 30 June 2012

Period ending 30 June 2013

Period ending 30 June 2014

Period ending 30 June 2015

Period ending 30 June 2016

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are a senior executive of a wholly owned subsidiary. You entered into your current employment contract (EC) during the 2006-07 financial year, which does not have a fixed term.

As a way of motivating employees on a long term basis, your employer will offer shares to its employees and employees of its subsidiaries under the share plan.

Under your EC you are entitled to participate in the share plan at a minimum level of ordinary shares per annum.

A termination clause of your EC provides that you may terminate your employment by providing six months notice.

An additional clause of your EC provides that upon termination of your employment under the termination clause, you will be entitled to all unvested shares that have been allocated under the share plan.

The share offer will contains following conditions which have been provided and form part of this ruling.

You are not the age of retirement.

In addition to a requirement to remain employed for five years, the vesting of shares will be subject to performance criteria in which you may receive all, some or none of your share allocation.

You have previously forfeited shares under similar terms of the current offer due to the failure to meet all performance criteria.

At the time of accepting the offer the shares will be held in your name during this time and on the restrictions lifting you will have rights to receive dividends and voting rights.

For the purpose of this ruling subsection 83A-105(1) and (2) of the ITAA 1997, are satisfied in relation to the share plan.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177A

Income Tax Assessment Act 1936 Section 177C

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Subsection 83A-105(3)

Income Tax Assessment Act 1997 Section 83A-115.

Reasons for decision

Issue 1

Division 83A of the ITAA 1997 applies to an employee share scheme (ESS) interest if you acquire the interest under an ESS at a discount.

The discount in relation to the ESS interest is included in an employee's assessable income in the income year in which the interest is acquired.

However, where there is a real risk of forfeiture (RRF) the discount on the ESS interest is included in the employee's assessable income at the deferred taxing point.

Real risk of forfeiture test

Whether or not a RRF is present will depend on the facts and circumstances of each scheme and the individual circumstances of the employee.

An ESS interest acquired by an employee is at RRF if a reasonable person would consider that there is a real risk that the employee may forfeit or lose the ESS interest, other than by intentionally taking no action to realise the benefit.

The meaning of 'real' is something more than a mere possibility. An ESS interest will not be at real risk of forfeiture if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

Real risks of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to:

· a minimum term of employment, or

· performance hurdles.

There is no real risk of forfeiture where a scheme simply includes a condition which:

· restricts an employee from disposing of an ESS interest for a specified time

· allows an employee to request that the ESS interest be forfeited, or

· provides for an employee to forfeit an ESS interest if they are dismissed for fraud or gross misconduct.

You have stated the real risk of forfeiture in your situation is in relation to a minimum term of employment and performance hurdles.

Minimum term of employment

An ESS may provide for ESS interests to be forfeited if the employee doesn't complete a minimum term of employment.

We accept that there will be a real risk of forfeiture where the minimum term of employment is at least six months and the maximum deferral is no more than three years, or where the minimum term of employment is at least 12 months.

For ESS interests acquired outside these parameters, we will consider all the facts and circumstances to determine whether they are at a real risk of forfeiture.

Based on the facts you have provided, if you cease your employment within 12 months of the share allocation you will forfeit any unvested shares. As a result, the share allocation is consistent with the parameters set and is subject to a real risk that you may forfeit or loose the shares. Therefore, a real risk of forfeiture exists.

Performance hurdles

Where the service conditions are sufficient to satisfy the RRF test at the time of acquisition, it is not necessary to consider whether the performance conditions also satisfy the test.

In your case, it is considered that the service conditions sufficiently satisfy the RRF test therefore it is not necessary to consider if the performance conditions also satisfy the test.

Deferred taxing point

You will receive ESS interests that are subject to a real risk of forfeiture, therefore you will not be subject to tax on your ESS interests in the year of receipt but in the income year in which the deferred taxing point occurs.

The deferred taxing point will be the earliest of the following times:

· seven years after you acquired the share

· when you cease employment, or

· when there is no real risk of forfeiture and the scheme no longer genuinely restricts the disposal of the share

Issue 2

Part IVA of the ITAA 1936 gives the Commissioner the discretion to make a determination to cancel a tax benefit that has been obtained, or would but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA of the ITAA 1936 applies.

Before the Commissioner can exercise the discretion in subsection 177F(1) of the ITAA 1936, the requirements of Part IVA must be satisfied. These requirements are that:

1. a tax benefit as defined in section 177C, was or would, but for subsection 177F(1) of the ITAA 1936 have been obtained

2. the tax benefit was or would have been obtained in connection with a scheme as defined in section 177A of the ITAA 1936, and

3. having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA applies.

The definition of scheme in section 177A of the ITAA 1936 is very broad and includes any agreement, arrangement, plan or proposal.

The arrangement with regard to the employee share scheme as described in the facts section of this Ruling is a scheme as defined in section 177A of the ITAA 1936.

Tax benefit is defined in subsection 177C(1) of the ITAA 1936 to relate broadly to:

1. an amount not being included in the assessable income of the taxpayer of a year of income

2. a deduction being allowable to the taxpayer in relation to a year of income

3. a capital loss being incurred by the taxpayer during a year of income, or

4. a foreign tax credit being allowable to the taxpayer.

Section 177C of the ITAA 1936 provides for two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out.

Section 177D of the ITAA 1936 provides that Part IVA applies to a scheme in connection with which the taxpayer has obtained a tax benefit if, after having regard to eight specified factors, it would be concluded that a person who entered into or carried out the scheme, or any part of it, did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit.

In this case, the Commissioner has formed the view that, in the context of application of section 177D, no relevant scheme has been identified.

Therefore, Part IVA of the ITAA 1936 will not apply to deny the deferral of the taxing point in relation to the ESS that is the subject of this ruling application.

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