Edited version of private ruling

Authorisation Number: 1011555534958

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Ruling

Subject: Employee share scheme - real risk of forfeiture

Question 1

Is the discount received in relation to employee share scheme interests included in your assessable income under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

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

Answer

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

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You are an employee of a wholly owned subsidiary, in a senior management position.

During the income tax year you were granted a number of performance rights (rights) in your employer's parent company.

You cannot dispose of the rights.

No amount is payable for the grant of the rights or the exercise of the rights.

The vesting conditions attached to the rights are as follows:

A portion of rights will vest nine months after they were granted if you remain employed by your employer or a related body corporate at that date and the volume weighted average price (VWAP) of your employers shares on the three months before the vesting date is equal to or greater than a notional amount (tranche 1);

A portion of rights will vest nine months after they were granted if you remain employed by your employer or a related body corporate at that date and the VWAP of your employers shares on the three months before the vesting date is equal to or greater than a notional amount (tranche 2); and

A portion of rights will vest nine months after they were granted if you remain employed by your employer or a related body corporate at that date and the board determines, acting reasonably, that you have substantially met the key performance indicators (KPIs) to be agreed by you and your employer (tranche 3)

All shares issued to you on exercise of the rights will be ordinary shares and will be subject to a holding lock for 2 years and 11 months after the rights were granted. The plan rules also prevent you from disposing of the shares if it would constitute a contravention of insider trading provisions of the Corporations Act or a breach of your employer's securities trading policy.

If you resign your employment with the company prior to the vesting date all rights granted to you will lapse.

If your employment is terminated without clause prior to the vesting date rights will vest and shares will be issued to the value of termination benefits allowed without shareholder approval.

If your employment is terminated with cause prior to the vesting date all rights granted to you will lapse.

If your employment ceases due to your death, serious illness or total and permanent disablement prior to the vesting date the rights may vest or lapse at the discretion of the board.

If a change of control event occurs prior to the vesting date all rights granted to you will vest and a share will be issued to you in respect of each right.

If there is a material change in Australian taxation legislation governing employee remuneration, benefits or share schemes prior the vesting date the rights may vest or lapse at the discretion of the board.

If some other unanticipated event occurs prior to the vesting date the rights may vest or lapse at the discretion of the board. The board will only exercise this discretion where there is a genuine unanticipated event, for example compassionate grounds not covered by death, serious illness or total and permanent disablement. The board considers it highly unlikely that this discretion will be exercised.

You do not hold a beneficial interest in more than 5% of the shares in your employer and you are not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of your employer.

Your employer's share price has historically been very volatile.

While the predominant business of your employer's parent company may be the acquisition, sale or holding of shares, securities or other investments you are not employed by them, rather you are only employed by their subsidiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-10,

Income Tax Assessment Act 1997 Section 83A-20,

Income Tax Assessment Act 1997 Section 83A-25,

Income Tax Assessment Act 1997 Section 83A-35,

Income Tax Assessment Act 1997 Section 83A-105 and

Income Tax Assessment Act 1997 Section 83A-120.

Reasons for decision

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 disposing of it, exercising it or letting lapse.

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.

Based on the facts you have provided, your minimum term of employment (subject to good leaver provisions) is at least six months and the deferral period, being the holding period, is not more than three years (subject to further insider trading restrictions).

Therefore the rights allocation is consistent with the parameters set and is subject to a real risk that you may forfeit or lose them. Therefore a real risk of forfeiture exists.

Performance conditions

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.

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

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