Edited version of your private ruling

Authorisation Number: 1012338131345

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Ruling

Subject: Employee share scheme - deferred scheme - forfeiture - discount amount

Question 1

Will the discount in relation to your employee share scheme options be assessed in the income years in which the deferred taxing points occurred?

Answer

Yes.

Question 2

Will you be able to amend your assessment to exclude an amount of discount arising due to the granting of employee share scheme options after the relevant year, if you make the choice to forfeit the options under section 83A-310 of the Income Tax Assessment Act 1997?

Answer

No.

Question 3

Will you be able to amend your assessment to exclude an amount of discount arising due to the granting of employee share scheme options after the relevant year, if you have no choice but to forfeit the options under section 83A-310 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 4

Will you be able to claim a capital loss equal to the cost base of any forfeited employee share scheme options if a refund is not allowable under section 83A-310 of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 2011;

Income year ending 30 June 2012; and

Income year ending 30 June 2014.

The scheme commenced on:

1 July 2009

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 commenced employment with Company A and participated in an ESS offered by the company under which you were granted a number of options in two allotments.

The first allotment of options vested certain months after they were granted and the second allotment vested certain months after they were granted.

You did not pay any consideration to acquire the unlisted options.

All shares issued to you on exercise of the options will be ordinary Company A shares.

The options will expire, a number of years after they were granted.

The share price on the vesting date of the first allotment was less than the exercise price of the options.

You lodged your subsequent income tax return and recorded a discount amount.

You have provided copies of a number of documents, which for part of, and should be read in conjunction with this private ruling.

Assumptions

The share price will not reach a price higher than the respective exercise prices.

You will not exercise your Company A options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Section 83A-125

Income Tax Assessment Act 1997 Section 83A-310

Income Tax Assessment Act 1997 Section 109-60

Income Tax Assessment Act 1997 Section 112-20

Reasons for decision

Division 83A of the Income Tax Assessment Act 1997 (ITAA1997)

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

Division 83A of the ITAA 1997 taxes discounts on ESS interests acquired either upfront, for example at acquisition, or on a deferred basis. The method will depend on the nature of the employee share scheme rather than at the election of the employee, as was the case under Division 13A of the Income Tax Assessment Act 1936.

Generally, 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.

The main features of Division 83A of the ITAA 1997 provisions in relation to deferred schemes are as follows:

Deferral of tax to a later income year is available for taxpayers who participate in schemes where the ESS interests are at "real risk of forfeiture", or where employees can acquire ESS interests at 100% discount by salary sacrificing a maximum of $5,000. The "real risk of forfeiture" test does not apply to salary sacrifice schemes. The shorthand term used for this principle is "deferred" taxation:

Where deferred taxation applies to options, the deferred taxing point is the earliest of:

· Seven years after you acquired the option;

· When you cease the employment in respect of which you acquired the option;

· When there is no real risk of forfeiting the option and the scheme no longer genuinely restricts disposal of the option; or

· When there is no real risk of forfeiting the option or underlying share, and the scheme no longer genuinely restricts exercise of the option or disposal of the resulting share.

Refunds of tax paid on ESS interests that are later forfeited are available where the taxpayer had no choice but to forfeit the ESS interests, or where the taxpayer made a choice to resign from employment; and

Refunds are not available where the scheme is structured to protect employees from market risk, or where the forfeiture is intentional due to market conditions (eg the taxpayer chooses not to exercise rights because the exercise price exceeds the prevailing share price).

In your case, you were granted Company A options under an ESS which will be assessed under the Division 83A of the ITAA 1997 provisions.

These ESS options were granted with the requirement that you remain in continuous employment with Company A for specified periods of time. It is viewed that there was a RRF in relation to your Company A options and that the ESS was a deferred scheme. Therefore, the discount arising in relation to these ESS options must be included in the income years in which the deferred taxing points occurred.

The deferred taxing point in relation to the first allotment of options occurred when the vesting date occurred. The discount amount in relation to those options has been correctly included in your subsequent assessment.

The deferred taxing point of the second allotment of options occurred when the vesting date occurred, being the date when the condition of continuous employment in relation to the options was reached. The discount in relation to those options must be included in your income tax return in the income year in which the vesting date occurred.

Forfeiture of options

As outlined above, the availability of refunds on forfeited shares and options under Division 83A of the ITAA 1997 is not available where the forfeiture is due to a choice made by the taxpayer (except a choice to leave employment), or where the ESS is structured to protect participants from market risk.

If you have no choice but to forfeit the options, any tax paid in relation to those forfeited options is refundable. You may request an amendment of your assessment to exclude the discount previously included in your assessable income. There is no time limit for amending an assessment to exclude an amount from assessable income for an ESS interest which is forfeited or lost.

However, if you decide not to exercise your Company A options granted during the X and Y income years, and they are forfeited, you will not be eligible for a refund of any discount amounts included in your assessments because you will have made the choice to allow the options to lapse.

The capital gains tax (CGT) "market value substitution rule" in section 112-20 of the ITAA1997 specifically does not apply to an ESS interest forfeited by a taxpayer. It follows that, if a refund is not allowable under section 83A-310 of the ITAA 1997, the taxpayer may be able to claim a capital loss equal to the cost base of the forfeited ESS interests.

CGT treatment of an ESS interest after taxing point

In most cases, ESS interests are exempt from CGT implications until the interest has been taxed under the ESS provisions.

Once the discount on an ESS interest has been taxed under the ESS rules, the ESS interest is taxed under the CGT regime in the same manner as other CGT assets.

For ESS interests that are taxed under the deferral method, the ESS interest (and the share or option of which it forms part) is taken to have been reacquired immediately after the ESS deferred taxing point for its market value. This reacquisition rule for ESS interests taxed under the deferral method also resets the acquisition time to the deferred taxing point. This is relevant to an employee's eligibility for the CGT discount on a later disposal of the ESS interests.

In your case, once the deferred taxing point occurred in relation to your Company A options, the cost base of your ESS interests will be the market value on the date the deferred taxing point occurred.

Therefore, the cost base of your Company A options will be the market value of the shares on the date the deferred taxing points occurred. These dates will also be viewed as the dates you acquired the interests.

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