Edited version of private ruling

Authorisation Number: 1011716555133

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Ruling

Subject: Employee share scheme - Options

Question 1: Is the vesting date a taxing point in relation to the first tranche of options granted to you in the 2008-09 income year?

Answer: No.

Question 2: Is the market value of the first tranche of options granted to you in the 2008-09 income year calculated using an exercise period of 60 months?

Answer: No.

Question 3: Is the market value of the options reduced by a notional 'brokerage fee' when determining the amount to be included in your assessable income?

Answer: No.

Question 4: Is the grant of options during the 2009-10 income year treated as a tax-deferred scheme?

Answer: Yes.

Question 5: Do you calculate the market value of the first tranche of options granted to you in the 2009-10 income year using the column in Table 1 that is applicable to calculation percentages in the range 100% to 102.5%?

Answer: Yes.

Question 6: Is the market value of the first tranche of options granted to you in the 2009-10 income year calculated using an exercise period of 60 months?

Answer: Yes.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 2008

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.

You were previously employed by a publicly listed company.

Through this employment, you were granted share options on two separate occasions.

Grant 1

During the 2008-09 income year, you were offered the entitlement to participate in an employee share option grant. You accepted and were granted some options.

These options were subject to both performance and continuous employment obligations. If those conditions were met, the options would vest as follows:

Tranche 1 (1/3 of the options granted) during the 2009-10 income year

Tranche 2 (1/3 of the options granted) during the 2010-11 income year, and

Tranche 3 (1/3 of the options granted) during the 2011-12 income year.

Each tranche of options would then have an exercise period of five years from the relevant vesting date unless there was a change in control of the company in which all case options would vest immediately.

Further, in the event that you were to cease employment with the company, any unvested options would automatically lapse at that time. For any options that had vested at that time, you would have one month to exercise them. However, like most terms within the Staff Option Plan, this could be altered for individual employee circumstances at the discretion of the Board of Directors.

There was also a prohibition on the grant of options to an employee who owned or controlled more than 5% of all shares then on issue.

You did not elect to be taxed upfront on these options. Rather, you had chosen to have the taxing point deferred until the options were exercised and subsequently disposed of.

Grant 2

During the 2009-10 income year, you were offered the entitlement to participate in another employee share option grant. You accepted and were granted further options. These options carried the same vesting and exercise conditions as described above in the Grant 1 section.

Subsequent events

Following the second grant of options, you agreed to a redundancy with the company as they were moving the majority of their operations and therefore their positions offshore.

Your separation date with the company was after the vesting date for the first tranche of options in each grant. As part of this separation, it was agreed that you would be given 24 months from your separation date for any unvested options to vest as well as to exercise any vested options within this timeline. This was a special arrangement approved by the Board of Directors in your individual circumstances and differs to the standard conditions of the Staff Option Plan for employees ceasing employment that you noted above under the Grant 1 section.

Further, as a result of the performance conditions of your options, you forfeited some of the options granted to you during the 2009-10 income year.

The way this special arrangement applies to the balance of your options is as follows:

· The first tranche of each option grant would still vest at the original vesting date and you would have 24 months from your separation date to exercise period them

· The second tranche of each option grant would vest one year later and you would have 24 months from your separation date to exercise them

· The final tranche of each option grant would still vest another year later and you would have 24 months from your separation date to exercise them.

· None of these options have been exercised by you as yet.

· Taxation treatment by your employer: You requested an Employee Share Scheme Statement from your employer and this was provided to you. You then asked for the supporting calculation worksheet so you could understand how your discount had been calculated. This resulted in you asking your employer several questions regarding the calculation and them subsequently amending their original calculation and sending you a revised Employee Share Scheme Statement.

· They have performed two calculations, one for each grant.

· Their process and assumptions in arriving at their calculation for the options granted during the 2008-09 income year are as follows:

· These were pre-1July 2009 options that were subject to the transitional rules as you had not elected to be taxed up front and a cessation time had not occurred prior to 1 July 2009. As a result, they have applied the new rules.

· For the first tranche of these options that vested, they have taken this date as the deferred taxing point at which a discount must be calculated as at this date there is no longer a real risk of forfeiture. This is because they have vested and are now able to be exercised.

· For the remaining options they have used the separation date as the deferred taxing point because even though they have not yet vested, this is the earlier of the choices given by the ATO and the applicable legislation for the deferred taxing point of rights.

· As the employee options are not listed (only the underlying shares are listed), they calculated the discount using the taxation tables in the Income Tax Assessment Regulations 1997 Division 83A.

· They have calculated the calculation percentage with reference to the market value of the underlying share at the deferred taxing point (which was the weighted average share price of the last five trading days to the deferred taxing point). The calculation percentage for both the first tranche and the remaining options was over 110% so table 2 in regulation 83A-315.09 has been used as stipulated the Regulations.

· For the first tranche of these options, they have used an exercise period of five years (60 months) as this was the original exercise time offered in your option certificate for these options. They have used the original exercise period as your employment had not yet been terminated at the vesting date of these options.

· For the remaining options, they have used an exercise period of 24 months as this is in line with what was being offered to you in your redundancy and separation letter as at the separation date and deferred taxing point for these options.

· They have then used the base percentage and additional percentage (along with the excess shown in the calculation worksheet) to calculate a regulation value of the options and after deducting an amount for a brokerage fee have come up with a total discount and this discount has been included in your Employee Share Scheme statement under ESS interests acquired pre 1 July 2009 where a cessation time has occurred during the financial year.

Their process and assumptions in arriving at their calculation for the options granted during the 2009-10 income year are as follows:

· They have called this a tax-deferred scheme as there is a real risk of forfeiture based on the performance and continuous employment obligations and the scheme is available to all employees.

· For the first tranche of these options which vested, they have taken this date as the deferred taxing point at which a discount must be calculated as at this date, there is no longer a real risk of forfeiture.

· For the remaining options, they have used the separation date as the deferred taxing point because even though they have not yet vested, this is the earlier date of the choices given by the ATO and the applicable legislation for the deferred taxing point of rights.

· As the employee options are not listed (only the underlying shares are listed), they calculated the discount using the taxation tables in the Income Tax Assessment Regulations 1997 Division 83A.

· They have calculated the calculation percentage with reference to the market value of the underlying share at the deferred taxing point (which was the weighted average share price of the last five trading days to the deferred taxing point). The calculation percentage for both the first tranche and the remaining options was under 110% so table 1 in regulation 83A-315.08 has been used as stipulated the Regulations.

· For the first tranche of these options, they have used an exercise period of five years (60 months) as this was the original exercise time offered in your option certificate for these options. They have used the original exercise period as your employment had not yet been terminated at the vesting date of these options.

· For the remaining options, they have used an exercise period of 24 months as this is in line with what was being offered to you in your redundancy and separation letter as at the separation date and deferred taxing point for these options.

· They have then used this percentage to calculate a regulation value of the options and after deducting an amount for a brokerage fee have come up with a total discount and this discount has been included in your Employee Share Scheme statement under discount from deferral schemes.

You have provided certain documents that are to be read with, and form part of the description of the scheme for the purpose of this ruling.

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-35

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-315

Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Income Tax Assessment Regulations 1997 Division 83A

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139CB

Reasons for decision

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

Summary

The vesting date is not a taxing point in relation to the first tranche of options granted to you in the 2008-09 income year.

Detailed reasoning

The tax rules for employee shares schemes (ESS) were changed with effect from 1 July 2009.

The new rules apply to options (transitioned options) that were granted before 1 July 2009 if:

· The options were qualifying rights

· The recipient hadn't chosen to have the discount included in their assessable at the time they were granted, and

· The cessation time didn't happen before 1 July 2009.

Some of the former rules continue to apply to transitioned options and some of the new rules apply.

The deferred taxing point

The deferred taxing point for transitioned options is worked out using the former rules - that is the cessation time. The cessation time is the earliest of certain listed taxing points.

The cessation time does not happen to the first tranche of options granted to you during the 2008-09 income year due to them vesting as this is not a listed taxing point.

The cessation time actually happens due to the termination of your employment.

Question 2

Summary

The market value of the first tranche of options granted to you in the 2008-09 income year are not calculated using an exercise period of 60 months.

Detailed reasoning

The taxation tables in the Income Tax Assessment Regulations 1997 Division 83A provide a method of calculating value of a right to acquire a beneficial interest in a share on a particular day. The calculation is performed using the attributes of the right as they were on that day.

As stated above, the cessation time for the first tranche of options granted to you during the 2008-09 income year happened due to the termination of your employment, so this is the deferred taxing point and the 'particular day' on which the value of the options is to be calculated.

The instructions for using Table 1 state that the Table 1 percentage is to be chosen from the row that covers the period, in months, from the particular day until the last day on which the option may be exercised (the exercise period).

On the date of termination of your employment, the last day of the exercise period for the first tranche of options granted to you during the 2008-09 income year was 24 months later.

Question 3

Summary

The market value of the options is not reduced by a notional 'brokerage fee' when determining the amount to be included in your assessable income.

Detailed reasoning

The amount to be included in your assessable income for the income year in which the deferred taxing point occurs is the difference between the market value of the options (calculated as at the deferred taxing point) less the cost base of the options.

The cost base of the options is determined in the same way that it would be if the issue related to capital gains tax. That means that you can only count expenses that you have actually incurred.

The cost base of the options does not include notional expenses or expenses that you may incur in the future.

The market value of the options is not reduced by a notional 'brokerage fee' when determining the amount to be included in your assessable income because you have not incurred the notional 'brokerage fee' as an expense.

Question 4

Summary

The grant of options during the 2009-10 income year is treated as a tax-deferred scheme.

Detailed reasoning

The status of the grant of options in the 2009-10 income year as being a tax-deferred scheme is related to the attributes of the scheme rather than the income year that the discount is included in your assessable income.

The grant of options in the 2009-10 income year is treated as a tax-deferred scheme because all of the following conditions are met:

· The options provide you with the right to acquire ordinary shares in a company

· You were an employee of the company when the options were granted and they were granted in relation to your employment

· The options were granted to you at a discount to their market value

· The company is not a share trading or investment company

· You don't hold or control more than 5% of the shares in the company

· The options were at a real risk of forfeiture or loss (other than by disposing of them, exercising them or letting them lapse) when they were granted to you

Being a tax-deferred scheme, the amount of the discount due to the grant of the options is calculated as at the deferred taxing point (even if that happens in the year of grant).

Generally, an employee's liability to income tax is deferred to a later income year. However, in your case, your early termination of employment brought forward your liability to income tax for most of your options.

Question 5

Summary

You calculate the market value of the first tranche of options granted to you in the 2009-10 income year using the column in Table 1 that is applicable to calculation percentages in the range 100% to 102.5%.

Detailed reasoning

The market value of the first tranche of options granted to you in the 2009-10 income year is determined step-wise beginning with working out the date of the deferred taxing point.

There are four possible deferred taxing points. You choose the one that happens first. They are:

· The later of the lifting of the forfeiture and loss conditions mentioned above and the removal of genuine disposal restrictions on the options

· The cessation of your employment

· Seven years from the date of grant, and

· The later of the lifting of the forfeiture and loss conditions mentioned above and also the removal of exercise restrictions and forfeiture, loss and disposal restrictions on the shares acquired by exercising the options.

The fourth possible deferred taxing point happened on the vesting date. This is the day on which the value of the options is to be calculated.

Your employer has determined a calculation percentage between 100% and 102.5% (before rounding) from the market value of the shares on the vesting date and the exercise price for these options.

You therefore use the column in Table 1 that is applicable to calculation percentages in the range 100% to 102.5%.

Note: The calculation percentage is not rounded.

Question 6

Summary

The market value of the first tranche of options granted to you in the 2009-10 income year is calculated using an exercise period of 60 months.

Detailed reasoning

As stated above, the deferred taxing point for the first tranche of options granted to you in the 2009-10 income year occurred on the vesting date.

The taxation tables in the Income Tax Assessment Regulations 1997 Division 83A provide a method of calculating value of a right to acquire a beneficial interest in a share on a particular day. The calculation is performed using the attributes of the right as they were on that day.

The instructions for using Table 1 state that the Table 1 percentage is to be chosen from the row that covers the period, in months, from the particular day until the last day on which the option may be exercised (the exercise period).

On the vesting date, the last day of the exercise period for the first tranche of options granted to you in December 2009 was 60 months.

Subsequent adjustments to the exercise period are not taken into account when performing this calculation.

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