Edited version of private ruling

Authorisation Number: 1011609434325

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Ruling

Subject: Exempt Share Plan

Question 1

Will the plan constitute an employee share scheme within the meaning of subsection 83A-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the shares to be acquired by the Employee under the plan constitute ESS interests as referred to in section 83A-20 of the ITAA 1997?

Answer

Yes

Question 3

Will the shares to be acquired by the Employee under the plan meet the requirements of section 83A-35 of the ITAA 1997 and enable the Employee to access the $1,000 exemption concession in subsection 83A-35(2) of the ITAA 1997?

Answer

Yes

Question 4

Will the conditions prohibiting the disposal of shares contained in the Plan Rules be sufficient for the purposes of meeting the exemption conditions of subsection 83A-35(8) of the ITAA 1997?

Answer

Yes

Question 5

Will the requirements relating to the sale of small or minimum numbers of shares constitute conditions that breach subsection 83A-35(7) of the ITAA 1997?

Answer

No

Question 6

Will the discount on the shares be equal to their market value at the time of their acquisition by the Employee?

Answer

Yes

Question 7

Will the cost base of the shares for the purpose of Part 3.1 of the ITAA 1997 be their market value at the time of their acquisition by the Employee?

Answer

Yes

Question 8

If the amount paid to the Employee in respect of the buy-back of the shares by the Employer exceeds the amount debited against amounts outstanding to the credit of the Employer's share capital account, will the excess be taken to be a dividend paid to the Employee in accordance with Division 16K of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 9

Where the Employer is taken to have paid a franked dividend to the Employee in accordance with section 159GZZZP of the ITAA 1936, will the Employee be entitled to a tax offset equal to the amount of the franking credit on that dividend under subsection 207-20(2) of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Employer intends to implement an employee share plan which is designed to conform with Division 83A of the ITAA 1997 so as to provide its employees with an opportunity to receive up to $1,000 worth of shares each year which are exempt from income tax.

Assumption

For the purposes of Division 1A of Part IIIAA of the ITAA 1936, the Employee will be a 'qualified person' in relation to any franked dividend he will be taken to have been paid by the Employer in accordance with section 159GZZZP of the ITAA 1936.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 44(1)

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1936 Section 159GZZZP

Income Tax Assessment Act 1936 Subsection 159GZZZP(1)

Income Tax Assessment Act 1936 Division 1A of Part IIIAA

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subsection 83A-10(1)

Income Tax Assessment Act 1997 Subsection 83A-10(2)

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Subsection 83A-20(1)

Income Tax Assessment Act 1997 Subsection 83A-25(1)

Income Tax Assessment Act 1997 Section 83A-30

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Subsection 83A-35(2)

Income Tax Assessment Act 1997 Paragraph 83A-35(2)(b)

Income Tax Assessment Act 1997 Subsection 83A-35(3)

Income Tax Assessment Act 1997 Subsection 83A-35(4)

Income Tax Assessment Act 1997 Subsection 83A-35(5)

Income Tax Assessment Act 1997 Subsection 83A-35(6)

Income Tax Assessment Act 1997 Subsection 83A-35(7)

Income Tax Assessment Act 1997 Subsection 83A-35(8)

Income Tax Assessment Act 1997 Subsection 83A-35(9)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Paragraph 202-45(c)

Income Tax Assessment Act 1997 Subsection 207-20(1)

Income Tax Assessment Act 1997 Subsection 207-20(2)

Does Part IVA or any other anti-avoidance rules apply to this ruling?

Part IVA of the ITAA 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

We have also not fully considered the application of other anti-avoidance rules set out under sections 45A and 45B of the ITAA 1936, section 204-30 and Divisions 725 and 727 of the ITAA 1997 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether these rules apply we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether they may apply.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the EMPLOYEE.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will the plan constitute an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997?

Yes.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 to include a scheme under which ESS interests in a company are provided to employees of that company or a subsidiary of that company, in relation to the employees' employment.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as a beneficial interest in a share in the company, or a right to acquire a beneficial interest in a share in the company.

Participants under the plan are employees of the Employer or a subsidiary of the Employer and are provided with a beneficial interest in shares in the Employer (that is, an ESS interest) in relation to their employment.

The plan therefore constitutes an employee share scheme within subsection 83A-10(2) of the ITAA 1997.

Question 2

Will the shares to be acquired by the Employee under the plan constitute ESS interests as referred to in section 83A-20 of the ITAA 1997?

Yes.

Subsection 83A-20(1) of the ITAA 1997 provides that, unless Subdivision 83A-C applies, Subdivision 83A-B applies to ESS interests acquired under an employee share scheme at a discount.

Where consideration for an ESS interest is provided on a pre-tax basis (such as under an effective salary sacrifice arrangement), the employee is treated for the purposes of Division 83A of the ITAA 1997 as having acquired the ESS interest at a discount.

Despite having to pay full market value consideration for the shares of the Employer, as those shares are acquired under the plan by the Employee in lieu of his pre-taxed remuneration, they will be treated as having been acquired at a discount for the purposes of Subdivision 83A-B of the ITAA 1997.

Subdivision 83A-C of the ITAA 1997 will not apply to ESS interests acquired under the plan.

Question 3

Will the shares to be acquired by the Employee under the plan meet the requirements of section 83A-35 of the ITAA 1997 and enable the Employee to access the $1,000 exemption concession in subsection 83A-35(2) of the ITAA 1997?

Yes.

Pursuant to subsection 83A-25(1) of the ITAA 1997, the discount given in relation to an ESS interest must be included as assessable income in the income year in which the interest was acquired.

Section 83A-35 of the ITAA 1997 reduces the amount included in your assessable income under subsection 83A-25(1) by that amount, but up to a maximum of $1,000, where your adjusted taxable income for the income year does not exceed $180,000 (as required under subsection 83A-35(2) of the ITAA 1997) and the ESS interest is one in which subsections (3) to (9) of section 83A-35 apply.

The Employee will not derive adjusted taxable income of more than $180,000 per annum in the income years ending 30 June 2011, 2012 and 2013, thereby satisfying paragraph 83A-35(2)(b) of the ITAA 1997.

At the time the Employee will acquire ESS interests under the plan, all the ESS interests available for acquisition under the plan will relate to ordinary shares in the Employer which is his current employer, thereby satisfying subsections 83A-35(3) and 83A-35(4) of the ITAA 1997.

The predominant business of the Employer is not the acquisition, sale or holding of shares, securities or other investments, thereby satisfying subsection 83A-35(5) of the ITAA 1997.

At the time the Employee will acquire the ESS interests under the plan, the plan will be operated on a non-discriminatory basis in relation to at least 75% of Australian resident permanent employees of the Employer who have completed at least 3 years service with the Employer, thereby satisfying subsection 83A-35(6) of the ITAA 1997.

At the time the Employee will acquire the ESS interests under the plan, there is no real risk under the plan that the Employee will forfeit or lose those ESS interests other than by disposal, thereby satisfying subsection 83A-35(7) of the ITAA 1997.

The plan will be operated so as not to permit disposal of the ESS interests acquired by the Employee and all other participants under the plan before the earlier of 3 years after its acquisition and cessation of their employment with the Employer, thereby satisfying subsection 83A-35(8) of the ITAA 1997.

Immediately after the Employee will acquire the ESS interests, he will not hold a beneficial interest in more than 5% of the shares in the Employer or be in a position to cast or control the casting of more than 5% of the maximum number of votes that may be cast at a general meeting of the Employer, thereby satisfying subsection 83A-35(9) of the ITAA 1997.

As the Employee will not derive adjusted taxable income of more than $180,000 per annum in the income years ending 30 June 2011, 2012 and 2013, and the ESS interests to be acquired by him are ones in which subsections (3) to (9) of section 83A-35 of the ITAA 1997 apply, the amount included in the Employee's assessable income under subsection 83A-25(1) of the ITAA 1997 in those income years, which under the plan cannot exceed more than $1,000, will be reduced by that amount pursuant to section 83A-35.

Question 4

Will the conditions prohibiting the disposal of shares contained in the Plan Rules be sufficient for the purposes of meeting the exemption conditions of subsection 83A-35(8) of the ITAA 1997?

Yes.

Subsection 83A-35(8) of the ITAA 1997 applies to ESS interests acquired under an employee share scheme if those and all other ESS interests acquired under the scheme are not permitted to be disposed of before the earlier of the end of the period of 3 years after the ESS interests are acquired and when the holder of the ESS interests cease their employment with their employer.

Under the Plan Rules governing the plan, participants allocated shares under the plan will not be permitted to dispose of their shares before the earlier of three years after their date of acquisition and cessation of their employment with the Employer.

Subsection 83A-35(8) of the ITAA 1997 will therefore apply to the shares acquired under the plan.

Question 5

Will the requirements relating to the sale of small or minimum numbers of shares constitute conditions that breach subsection 83A-35(7) of the ITAA 1997?

No.

Where an ESS interest acquired under an employee share scheme is a beneficial interest in a share, subsection 83A-35(7) of the ITAA 1997 applies to those ESS interests if, when you acquire them there is no real risk under the conditions of the scheme that the ESS interest will be forfeited or lost other than by disposing of it.

At the time the Employee will acquire the shares under the plan, there will not be any requirements relating to their sale under the plan which will constitute a real risk that the Employee will forfeit or lose those shares other than by disposal.

Subsection 83A-35(7) of the ITAA 1997 will therefore apply to the shares acquired under the plan.

Question 6

Will the discount on the shares be equal to their market value at the time of their acquisition by the Employee?

Yes.

The value of the discount given in relation to an ESS interest that is included as assessable income under subsection 83A-25(1) of the ITAA 1997 is the market value of the discount.

The market value of the discount on the shares provided to the Employee under the plan will equal the market value of the shares at the time of their acquisition.

Question 7

Will the cost base of the shares for the purpose of Part 3.1 of the ITAA 1997 be their market value at the time of their acquisition by the Employee?

Yes.

The employee share scheme rules consider ESS interests to be acquired for their market value when initially acquired, or reacquired for their market value immediately after the point they are taxed (ESS deferred taxing point) under Division 83A of the ITAA 1997.

ESS interests, and shares or rights of which the interests form part, in respect of which Subdivision 83A-B of the ITAA 1997 applies are therefore taken to have been acquired for their market value from the point at which the ESS interests are initially acquired (section 83A-30 of the ITAA 1997) (see paragraph 1.211 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009).

The first element of the cost base of the shares acquired by the Employee will therefore be the market value of those shares at the time of their acquisition.

Question 8

If the amount paid to the Employee in respect of the buy-back of the shares by the Employer exceeds the amount debited against amounts outstanding to the credit of the Employer's share capital account, will the excess be taken to be a dividend paid to the Employee in accordance with Division 16K of the ITAA 1936?

Yes.

Division 16K of Part III of the ITAA 1936 applies where a company buys a share in itself from a shareholder and cancels the share.

Section 159GZZZP of the ITAA 1936 provides that in an off-market buy-back of shares (that is, where the shares aren't listed on a stock exchange and purchased in the ordinary course of business of a stock exchange), the difference between:

· the amount of money or the market value of any property the shareholder receives as consideration for the buy-back (i.e. the purchase price); and

· the part (if any) of the purchase price in respect of the buy-back which is debited against the company's share capital account,

is taken to be a dividend paid by the company to the seller as a shareholder out of profits derived by the company on the day the buy-back occurs.

Where the purchase price paid by the Employer to the Employee in respect of the buy-back of the Employee's shares under the plan exceeds the amount debited by the Employer against its share capital account (i.e. the issue price of those shares), the excess amount will be taken to be a dividend paid to the Employee on the day the buy-back occurs pursuant to subsection 159GZZZP(1) of the ITAA 1936, and included in the Employee's assessable income under subsection 44(1) of the ITAA 1936.

The balance, being the amount debited against the Employer's share capital account, will be taken to be a return of capital.

Question 9

Where the Employer is taken to have paid a franked dividend to the Employee in accordance with section 159GZZZP of the ITAA 1936, will the Employee be entitled to a tax offset equal to the amount of the franking credit on that dividend under subsection 207-20(2) of the ITAA 1997?

Yes.

A dividend amount paid by a company to a shareholder in accordance with section 159GZZZP of the ITAA 1997 is frankable but only to the extent that the purchase price does not exceed the market value of the share at the time of the buy-back if the buy-back did not occur and was never proposed to occur (paragraph 202-45(c) of the ITAA 1997).

An amount equal to the amount of the franking credit on the dividend paid by the Employer to the Employee will be included in the Employee's assessable income under subsection 207-20(1) of the ITAA 1997.

Pursuant to subsection 207-20(2) of the ITAA 1997, vendor shareholders such as the Employee will ordinarily be entitled to a tax offset equal to the amount of the franking credit of the dividend component of the purchase price paid to them by the company.

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