Edited version of your private ruling

Authorisation Number: 1012563315488

Ruling

Subject: Employee Share Scheme

Question 1

In order to satisfy the reporting requirements pursuant to section 392-5 of the Taxation Administration Act 1953 (TAA), when does the tax acquisition date arise in relation to the Delivery Methods contemplated by the taxpayer in respect of key management personnel pursuant to Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Delivery Method 1 - upon acceptance of the offer by the company, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C of the ITAA 1997 applies.

Delivery Method 2 - upon acceptance of the offer by the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Delivery Method 3 - upon signing of the employment contract by the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Delivery Method 4 - upon acceptance of the offer by the employee subsequent to the signing of the employment contract, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Delivery Method 5 - upon allotment of the shares or rights to the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Question 2

In order to satisfy the reporting requirements pursuant to section 392-5 of the TAA, when does the tax acquisition date arise in relation to the Delivery Methods contemplated by the taxpayer in respect of directors pursuant to Division 83A of the ITAA 1997?

Answer

For all delivery methods proposed, the acquisition date will be the date on which shareholder approval is obtained.

This ruling applies for the following periods:

Years ended 30 June 2014 to 30 June 2016

The scheme commences on:

24 September 2013

Relevant facts and circumstances

The taxpayer is an Australian based company.

The taxpayer currently has a number of employee incentive plans in place, which include the Employee Share Bonus Plan (Share Plan), the Stock Option Plan (Option Plan), and the Share Purchase Plan and Loan Scheme (Loan Scheme).

The taxpayer states that the Share and Option Plans were approved by shareholders on 31 October 2011. The taxpayer further states that these Plans will expire on 30 November 2014.

On 7 April 2010 the Loan Scheme was approved by shareholders for the purposes of the Corporations Act 2001.

The taxpayer is contemplating offering options and shares under its various equity plans to employees, stating that the granting of the options or shares will be subject to service conditions and meeting performance targets. The taxpayer plans on using one of the following delivery methods (the 'delivery methods'):

Delivery Method 1: Invitation - the taxpayer will invite an employee to make an offer on the basis set out in the invitation by completing and returning an application form. The taxpayer would then accept the application on receipt.

Delivery Method 2: Offer - the taxpayer will offer equity to an employee who would accept the offer by completing and returning an acceptance form.

Delivery Method 3: Employment Contract, Offer - a prospective employee's employment contract would include an offer for a specified number of options or shares in the taxpayer. The offer would be accepted upon the signing of the employment contract.

Delivery Method 4: Employment Contract, Right to be offered - a prospective employee's employment contract to contain a clause requiring the company to offer the employee a specified number of options or shares in the taxpayer after acceptance of the employment contract.

Delivery Method 5: No documentation - the taxpayer would allot options or shares to employees without any supporting documentation.

All options or shares offered to directors are subject to shareholder approval. In the event that shareholder approval is not obtained, directors will not be compensated in some other form. However, in relation to offers made to key management personnel, shareholder approval is not necessary.

Relevant legislative provisions

Division 83A of the Income Tax Assessment Act 1997

Section 392-5 of the Taxation Administration Act 1953

Reasons for decision

EMPLOYEE SHARE SCHEMES

Broadly, Division 83A of the ITAA 1997 requires employees to include in their assessable income discounts¹ received on shares, rights and stapled securities that the employee (or their associate) acquired under an employee share scheme (ESS). Division 83A of the ITAA 1997 replaced former Division 13A of the ITAA 1936 and applies to arrangements entered into from 1 July 2009 onwards.²

Division 83A of the ITAA 1997 ensures that employees are liable to tax on benefits from the ESS at their marginal tax rate either at acquisition (under subdivision 83A-B) or on a deferred basis (under subdivision 83A-C).

Subsection 83A-10(1) of the ITAA 1997 provides that an ESS interest in a company is a beneficial interest in a share in the company or a right to acquire a beneficial interest in a share in the company.

Subsection 83A-10(2) of the ITAA 1997 provides that an employee share scheme is:

…a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of

i. the company; or

ii. subsidiaries of the company;

in relation to the employees' employment.

Consequently, Division 83A of the ITAA 1997 applies to past, existing and prospective employees of a company. This is to ensure that the provisions of ESS interests are not designed to occur before or after employment in order to circumvent the provisions.

Subsection 83A-25(1) of the ITAA 1997 provides that an employee's assessable income in the year in which they acquire an ESS interest includes the discount they received in relation to the interest.

Division 83A of the ITAA 1997 introduced the concept of indeterminate rights, which did not exist in former Division 13A of the ITAA 1936. This concept is detailed in section 83A-340 of the ITAA 1997 which states that if a taxpayer acquires a beneficial interest in a right which later becomes a right to acquire a beneficial interest in a share, it will be deemed that the original right had always been a right to acquire a beneficial interest in the share.

Section 83A-340 of the ITAA 1997 provides two examples to illustrate the circumstances in which this may occur. Example one is when an employee acquires a right to acquire at a future time shares with a specified total value or an indeterminate amount of shares. The second example is when an employee acquires a right under which he/she must be provided with either ESS interests or cash. Provided that the employee cannot determine for themselves how the right is ultimately satisfied (that is, the employer or the operator of the plan makes the ultimate decision) such a right will be indeterminate.

Class Ruling 2011/19 Income Tax: Barclays PLC Share Award Schemes (CR 2011/19) provides guidance on the Commissioner's view with regards to indeterminate rights. At paragraph 51, CR 2011/19 states that for section 83A-340 of the ITAA 1997 to be satisfied, the right must be capable of becoming a right to acquire a beneficial interest in a share and must become such a right.

Paragraph 53 of CR 2011/19 further explains that the rights in the examples provided in section 83A-340 of the ITAA 1997 are both rights to receive property. However, the precise extent or nature of the property is yet to be determined at the time of acquisition. As both rights are capable of becoming a right to acquire a beneficial interest in a share, due to the ability to acquire the property being inherent in the right originally acquired, section 83A-340 of the ITAA 1997 is satisfied.

CR 2011/19 also explains at paragraphs 54 to 57 that in the circumstance where an employee has acquired a right to nothing more than the exercise of a Trustee's absolute discretion or due administration of the plan, such a right is not a right to receive property and is therefore not capable of becoming a right to acquire a beneficial interest in a share. The right is not an indeterminate right and section 83A-340 of the ITAA 1997 is not satisfied.

This reasoning is supported by Gartside v. Inland Revenue Commissioners [1968] AC 553, in which the Court described an entitlement of a beneficiary in a discretionary trust as:

…a right to require the trustees to consider whether they will pay you something does not enable you to claim anything. If the trustees do decide to pay you something, you do not get it by reason of having the right to have your case considered; you get it only because the trustees have decided to give it to you.

Meaning of the term 'acquire'

The legislation does not provide a definition of the meaning of the term 'acquire'. As such, guidance on the meaning can be found in case law. It should be noted that the following cases relate to the application of former Division 13A of the ITAA 1936 however, the Commissioner generally accepts the principles established in these cases as having application to Division 83A of the ITAA 1997.

Where shareholder approval was not required

The Court found in Commissioner of Taxation v McWiliam [2012] FCAFC 105 (McWilliam) that, among other things, where there is no requirement to obtain shareholder approval, the acquisition of a right occurs when the right is created in or transferred to the employee.

The Court further found that a contractual right to receive options was a right to acquire shares for the purposes of Division 13A of the ITAA 1936.

Right to acquire subject to shareholder's approval

In Fowler v Federal Commissioner of Taxation [2013] FCAFC 69 (Fowler) a company resolved to issue options to acquire shares in the company to a non-executive director's superannuation fund as part of the director's remuneration, subject to shareholder approval. The Federal Court upheld the primary judge's reasoning that the performance of the contract on the company's part by the grant of the options required the fulfilment of a contingency, namely, the obtaining of the shareholders' approval. Gordon J elaborated that this was because the condition of obtaining shareholder approval may never have been met and due to this, the employee may never have acquired the options. As a consequence, the Court held that where an option to acquire the shares is subject to the approval of the company's shareholders, the shares are acquired at the time of shareholder approval.

Consistent with Fowler, the Commissioner's view in ATO Interpretative Decision (ATOID) 2007/66 is that where a right to acquire a share is subject to approval by shareholders at an annual general meeting, the timing of the acquisition of the right by the employee of the company for the purposes of Division 13A of the ITAA 1936 will be when approval is given by the shareholders. The Commissioner accepts that the general principles provided in ATOID 2007/66 are applicable to Division 83A of the ITAA 1997.

Advance shareholder approval for the granting the right in the future

The Administrative Appeals Tribunal in Willis v Commissioner of Taxation [2010] AATA 420 considered the acquisition date of options (rights) issued to the director and chairman of the board of directors of a company which issued options to acquire shares in the company. The relevant facts of this case are that the shareholders approved the future allotment of options under the Option Plan to the director on 3 May 2004. These options were to be issued within 12 months of this date. On 15 April 2005, the director was provided with an Issuer Sponsored Holding Statement which showed that the options had been allotted to the director on 8 April 2005. The Tribunal held that the shareholder approval obtained on 3 May 2004 was nothing more than approval in advance for the allotment of the options pursuant to the Option Plan. The Tribunal stated at best the director had a right to have the Board issue the option under the Option Plan within the following 12 months but that it could not be said that the director acquired the right, being the options, prior to those options being created. Consequently, it was held that the options were created on 8 April 2005, when the shares were allotted subsequent to shareholder approval having been obtained.

Similarly, ATOID 2009/85 provides guidance for the circumstance where shareholders authorise the company to sometime in the future grant an employee the right to acquire shares in the company. ATOID 2009/85 provides that the employee will acquire the rights at the time the company enters into a contract with the employee to grant the rights to acquire shares in the company. This is because former subsection 139G(c) of the ITAA 1936 provided that acquisition will occur at the time another person creates the right to acquire the shares in the employee.

RECORD KEEPING OBLIGATIONS - EMPLOYEE SHARE SCHEMES

Section 392-5 of the Taxation Administration Act 1953 (TAA) outlines the circumstances where an entity (the provider) must give the Commissioner a statement in relation to ESS interests. In summary, a statement must be given to the Commissioner in relation to the financial year if:

1. the provider has provided an ESS interest to an individual during the year and Subdivision 83A-B or 83A-C of the ITAA 1997 applies to the interests, or

2. the provider has provided an ESS interest to an individual, during the year or during an earlier year, Subdivision 83A-C of the ITAA 1997 applies to the interests and the ESS deferred taxing point for the interests occurs during the year.

Pursuant to subsections 392-5(2) and (3) of the TAA, the provider must give the statement to the Commissioner in the approved form, which may require the following information, among other things, to be disclosed:

1. the provider's ABN

2. information about the individual such as:

iii. the individual's name and address

iv. the individual's Tax File Number

v. number of interest acquired in the provider

vi. the amount paid for the interests

vii. the provider's estimate of the market value of the interests acquired at the relevant time.

Consequently, in order to fulfil its reporting obligations pursuant to section 392-5 of the TAA in a particular financial year, a provider must determine the acquisition date of ESS interests provided.

Application to the taxpayer's circumstances

The taxpayer is contemplating offering options and shares to its employees under its various existing equity plans. These plans are the Employee Share Bonus Plan (Share Bonus Plan), the Stock Option Plan (Option Plan), and the Share Purchase Plan and Loan Scheme Plan (Loan Scheme).

The Share Bonus and Option Plans were approved by shareholders on 31 October 2011. However, the shareholder approval is still required to be obtained for the Loan Scheme prior to making offers under the Scheme.

Tax acquisition date in respect of key management personnel

With regards to options and shares issued under all the proposed delivery methods for key management personnel, shareholder approval will not be required. However, service conditions and performance standards will need to be met prior to such shares or rights vesting.

Delivery Method 1: Invitation

Under this delivery method, it is proposed that the company will invite key management personnel to make an offer to acquire options or shares based on the procedure set out in the invitation. Once the employees complete the offer documents and return them to the company, the taxpayer would then accept the offer upon receipt. Service conditions and performance standards will need to be met prior to such shares or rights vesting.

For the purposes of paragraph 392-5(1)(a) of the TAA upon acceptance of the offer by the company, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Where ESS interests are provided in the form of rights to acquire shares in the taxpayer, such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson v Federal Commissioner of Taxation [1974] 1 NSWLR 627 and Fowler.

Where such shares or rights are subsequently forfeited because the employment conditions or performance hurdles are not met, section 83A-310 may apply to treat Division 83A as taken never to have applied to the ESS interest. In such circumstances a further reporting obligation would arise under section 392-10 of the TAA.

Delivery Method 2: Offer

Delivery Method 2 involves the taxpayer offering equity in the company to key management personnel. Acceptance of the offer will occur via the employee completing and returning an acceptance form to the company. As with Delivery Method 1, service conditions and performance standards will need to be met prior to such shares or rights vesting.

For the purposes of paragraph 392-5(1)(a) of the TAA upon acceptance of the offer by the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Where ESS interests are provided in the form of rights to acquire shares in the taxpayer, such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson and Fowler.

Where such shares or rights are subsequently forfeited because the employment conditions or performance hurdles are not met, section 83A-310 may apply to treat Division 83A as taken never to have applied to the ESS interest. In such circumstances a further reporting obligation would arise under section 392-10 of the TAA.

Delivery Method 3: Employment Contract, Offer

This delivery method involves a prospective key management personnel's employment contract including an offer for a specified number of options or shares in the taxpayer. The offer would be accepted at the time of the signing of the employment contract. As with Delivery Method 1 and 2, service conditions and performance standards will need to be met prior to such shares or rights vesting.

For the purposes of paragraph 392-5(1)(a) of the TAA upon signing of the employment contract by the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Where ESS interests are provided in the form of rights to acquire shares in the taxpayer such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson and Fowler.

Where such shares or rights are subsequently forfeited because the employment conditions or performance hurdles are not met, section 83A-310 may apply to treat Division 83A as taken never to have applied to the ESS interest. In such circumstances a further reporting obligation would arise under section 392-10 of the TAA.

Delivery Method 4: Employment Contract, Right to be offered

Under this delivery method, the taxpayer will include a clause in a prospective employee's employment contract requiring the company to formally offer the employee a specified number of options or shares in the taxpayer after the acceptance of the employment contract. Service conditions and performance standards will need to be met prior to such shares or rights vesting.

For the purposes of paragraph 392-5(1)(a) of the TAA upon acceptance of the offer by the employee subsequent to the signing of the employment contract, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

At the time of entering into the employment contract the contractual rights received by the employee are merely rights to have an offer made and as such are neither rights to acquire shares nor are they rights which are capable of becoming rights to acquire shares. Therefore no reporting requirement could arise under Division 392 of the TAA 1953 in respect of the contractual rights provided. However once the employee accepts the offer which was made consequent upon the terms of the employment contract he or she receives either shares or rights which are ESS interests to which either Subdivision 83A-B or 83A-C applies.

Where ESS interests are provided in the form of rights to acquire shares in the taxpayer such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson and Fowler.

Where such shares or rights are subsequently forfeited because the employment conditions or performance hurdles are not met, section 83A-310 may apply to treat Division 83A as taken never to have applied to the ESS interest. In such circumstances a further reporting obligation would arise under section 392-10 of the TAA.

Delivery Method 5: No documentation

The taxpayer proposes to allot options or shares to key management personnel under this Delivery Method without any supporting documentation. No shareholder approval will be necessary however service conditions and performance standards will need to be met prior to such shares or rights vesting.

For the purposes of paragraph 392-5(1)(a) of the TAA upon allotment of the shares or rights to the employee, the taxpayer would be taken to have provided ESS interests (being either shares in the taxpayer or rights to acquire shares in the taxpayer) to the employee to which either Subdivision 83A-B or 83A-C applies.

Where ESS interests are provided in the form of rights to acquire shares in the taxpayer such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson and Fowler.

Where such shares or rights are subsequently forfeited because the employment conditions or performance hurdles are not met, section 83A-310 may apply to treat Division 83A as taken never to have applied to the ESS interest. In such circumstances a further reporting obligation would arise under section 392-10 of the TAA 1953.

Tax acquisition date in respect of directors

With regards to the delivery methods used for directors of the taxpayer, although shareholder approval has already been obtained for the operation of the Employee Share Bonus Plan and the Stock Option Plan, each time an issue of options or shares to directors is made, it must be approved by the shareholders. This shareholder approval will be sought after the relevant delivery method has been utilised to deliver the shares or rights to the employee.

In the event that the shareholders do not approve the issue of the options or shares to the director under all the delivery methods, he/she will not be compensated in any other manner.

Where the acquisition of a right to acquire a share or the acquisition of a share is conditional upon the approval of shareholders, the acquisition of the beneficial interest in the relevant right or share would not occur for purposes of Division 83A until the approval was obtained. Consistent with Fowler, the right obtained by the director prior to approval is a right to insist that the company put to the shareholders for approval the issue of the right to shares. It is a right to invoke the aid or a court of equity but does not amount to a right to a beneficial interest in shares.

Furthermore, the right obtained prior to the shareholder approval is not a right to which section 83A-340 of the ITAA 1997 applies as it is not a right to receive property.

When shareholder approval is obtained and the ESS interests are in the form of rights to acquire shares in the taxpayer such rights are not indeterminate rights. The Commissioner has consistently viewed such rights which are subject to vesting conditions in the form of employment conditions or performance hurdles as being ESS interests at the time of acquisition. This is consistent with both the scheme of the former Division 13A and Division 83A. It also accords with the decisions in cases such as Donaldson and Fowler.

As both rights and shares are delivered prior to the approval of shareholders the tax treatment of ESS interests provided to directors will be consistent irrespective of the actual delivery method utilised. The date of shareholder approval will be taken to be the date of acquisition for all ESS interests provided.

¹ In summary, a discount is the difference between the market value at acquisition of the share, right or staple security and the amount of payment the issuing entity receives (see sections 995 and 725-150 of the ITAA 1997).

² It should be noted that Division 83A of the ITAA 1997 only applies in circumstances in which an ESS interest is provided at a discount.

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