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Edited version of private ruling

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Ruling

Subject: Employee Performance Rights Plan

Question

Does the amendment to the PRP Plan Rules to provide for the adjustment of the number of shares which may be acquired by the taxpayer if his Performance Rights vest cause an amount to be included in his assessable income under section 83A-110 of the Income Tax Assessment Act 1997 (ITAA 1997) in the year that the amendment is approved?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2011

The scheme commences on:

February 2011

Relevant facts

An Australian resident public company entered into an agreement with another entity for the disposal of one sub-group. The company subsequently announced a return capital to its shareholders.

The taxpayer was granted Performance Rights by the company at a time when the sub-group was still a wholly owned subsidiary of the company. Under the Performance Rights Plan (PRP) participating employees were granted a right to acquire fully paid ordinary shares in the company without any payment by the participating employees.

The Performance Rights are subject to employment and performance hurdles vesting conditions. The participating employees shares acquired from vested Performance Rights will be held on trust by the PRP Trustee until the conditions for delivery of the shares are satisfied.

Company shares held in the PRP Trust following the vesting of Performance Rights will not be released until the disposal restriction period has ended. The disposal restriction period will end on the first of:

§ the participating employee ceasing to be an employee of the company or a company group member;

§ the 7th anniversary of the date the Performance Rights relating to those shares were granted;

§ the company board determining that an event as defined in the PRP Rules has occurred in respect of the company (an event includes a take over, liquidation. delisting or demerger of the company); and

§ the board determining that the restriction period in respect of the shares should end provided that the board may only make such a determination where it is satisfied that the participating employee is in severe financial hardship.

The PRP Rules provide that if there is a return of capital the number of shares underlying a Performance Right will be adjusted in the manner specified in the ASX Listing Rules. The PRP Rules have been amended by the insertion of a new rule setting out a formula to be used in the event of a return of capital. The change is to take account the potential decrease in value of shares arising from the return of capital and to ensure that the Performance Right holders are not disadvantaged by the return of capital.

If the taxpayer leaves the company group before the end of the three year performance period his unvested Performance Rights will be forfeited, unless the board makes a determination that he is entitled to retain the Performance Rights as though he was still employed in the group.

The board has determined that the taxpayer may retain his unvested Performance Rights. That is, the unvested Performance Rights held by participating employees will not be forfeited if their employment with the sub-group is terminated after the sale of the sub-group. The Performance Rights remain subject to the PRP performance hurdle and vesting conditions. Further, if the Performance Rights vest in an employee, he will receive the shares free of disposal restrictions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-10

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

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Section 83A-120(2)

Income Tax Assessment Act 1997 Section 83A-120(3)

Income Tax Assessment Act 1997 Section 83A-120(4)

Income Tax Assessment Act 1997 Section 83A-120(5)

Income Tax Assessment Act 1997 Section 83A-120(6)

Income Tax Assessment Act 1997 Section 83A-120(7)

Detailed reasoning

All references are to the Income Tax Assessment Act 1997

Section 83A-110 includes in a person's assessable income, for an income year in which a deferred taxing point for the employee share scheme (ESS) interest occurs, the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest.

ESS Deferred taxing point

Section 83A-120 sets out when an ESS deferred taxing point will arise in relation to rights to acquire shares. At issue here is whether:

Subsection 83A-120(3) ESS deferred taxing point

Based on the information provided, it is considered that the amendments to the terms of the plan rules to allow for an increase in the number of company shares to which the Performance Rights relate constitute variations to the original contract. It is accepted that the original contract has not been rescinded and therefore the amendments to the plan rules do not result in a new contract for the Performance Right holders.

Accordingly, there is no disposal of the taxpayer's Performance rights as a result of the variation that would result in a deferred taxing point arising under subsection 83A-120(3).

Subsection 83A-120(2) ESS deferred taxing point

Subsection 83A-120(2) provides that an ESS deferred taxing point for an ESS interest is the earliest of the times mentioned in subsections 83A-120(4) to (7).

Subsection 83A-120(4) provides that the first possible taxing point is the earliest time when a taxpayer has not exercised the right, there is no real risk that you will forfeit or lose the ESS interest and you are no longer restricted from disposing the ESS interest. As the Performance Rights generally do not convert into shares until the performance hurdles are satisfied and this is no earlier than July 2012, there remains a risk that these hurdles may not be met and accordingly there is a real risk of forfeiture for the entirety of the income year ending 30 June 2011. As a consequence, the first possible taxing point will not arise in the income year ended 30 June 2011.

Subsection 83A-120(5) provides that the second possible taxing point will arise where the employment in respect of which you acquired the interest ends. On the basis that:

§ at the time of the granting of the Performance Right, the taxpayer was an employee of the sub-group.

§ he will remain an employee of the sub-group after its sale; and

§ it has been assumed that he will be employed by the sub-group for the remainder of the income year ending 30 June 2011,

the employment in respect of which the ESS interest was acquired has not ended.

Subsection 83A-120(6) does not apply as a period of 7 years has not elapsed since the granting of the Performance Rights.

Subsection 83A-120(7) provides the 4th possible taxing point. The taxing point will not arise in the income year ending 30 June 2011, given that the Performance Rights generally do not convert into shares until the performance hurdles (at the earliest in July 2012), are satisfied. As a consequence there remains a real risk that these hurdles will not be satisfied and the Performance Rights may not vest.

Accordingly, subsection section 83A-110 will not include an amount in relation to the Performance Rights in the income of the taxpayer in the income year ending 30 June 2011.

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