Edited version of your written advice

Authorisation Number: 1012772964895

Ruling

Subject: Employee share schemes

Question 1

Are the ESS interests, acquired by you under the Share Ownership Plan considered to be a 'right to acquire a beneficial interest in a share in the company', as described under subsection 83A-10(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will Subdivision 83A-C of the ITAA 1997 apply to the ESS interests having regard to the requirements of section 83A-105 of the ITAA 1997?

Answer

Yes

Question 3

If you continue to remain employed by the X (or its subsidiaries) will the deferred taxation point be the x when the trading restrictions on underlying shares are lifted?

Answer

Yes

This ruling applies for the following period(s)

Income year ended 30 June 2014

Income year ended 30 June 2015

The scheme commences on

1 July 20xx

Relevant facts and circumstances

You are an employee of the X group. You participated in X's Share Ownership Plan 20xx - 20xx.

The details of the X Share Ownership Plan 20xx-20xx are set out in the 'Terms and conditions for the share ownership plan 20xx-20xx' document ("SOP terms").

Under the SOP, employees of X or one of its subsidiaries, as selected by the Board of Directors ("the Board"), are granted X class B-shares as a reward for attaining established targets in each of three separate earning periods (being the 20xx, 20xx and 20xx calendar years). Employees are selected for each separate earning period.

The shares granted to employees under the X SOP are class B shares. These shares are quoted on a foreign stock exchange and represent the majority shareholding of X. Relative to class A shares, class B share hold an increased dividend entitlement (minimum of x.x% and maximum of x.x%) and are only entitled to one vote for every x shares held at a general meeting. Class A shareholders are entitled to x vote per number of shares held.

The maximum number of shares granted to an employee is determined at the discretion of the Board and the employees will receive a portion of that maximum as determined by their attaining certain performance targets. The amount of shares to be granted is determined after the end of the relevant earning period.

The performance targets applied to the ESS interests of the employees are set by the Board and are determined on the basis of X's turnover and on the Earnings before Interests and Taxes (EBIT) of the X Group where it is considered that it would not be appropriate for another target to be put in place.

Payment of the ESS interests is in the form of either:

• a combination of shares and cash payments; or

• a cash payment where the intention is for the individual receiving the payment to use the cash portion to purchase X shares.

Any cash portion of the interest will be made with respect to the value of the maximum number of shares granted on the relevant date.

The value of X shares is calculated using the weighted average share price of X shares on the foreign stock exchange on the transfer date.

The SOP terms also state that X guarantees payment of the total tax payable in respect of the ESS interests at the time of taxation.

Where an employee ceases employment with X before receiving their shares, their ESS interests will be cancelled. However, the Board may determine that an employee should be allowed to retain some or all of their interests in some cases.

In addition, where an employee ceases their employment with X within 15 months following the end of an earning period, they will be required to return any shares and/or associated cash payments received.

The SOP terms place a restriction on the ownership of the shares in the form of a fifteen month period, from the end of the relevant earning period, in which a recipient of the shares is not able to dispose of or transfer their shares.

You were determined to be eligible to participate in the SOP for the earning period beginning x.

On x, you were advised that your reward for the x year is x,xxx class B shares. In addition, you were advised a cash payment would be made to you to cover all tax and tax related costs arising from the reward.

Further, the Taxpayer was advised that the reward will be paid in x and that you are prohibited from transferring the shares during the 15 months following the end of the x earning year.

You do not hold, and did not hold when being granted ESS interests under the SOP, more than a 5% holding of shares in X (or a 5% voting right).

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-25

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-125

Income Tax Assessment Act 1997 section 83A-340

Reasons for decision

Employee Share Schemes

Division 83A applies to shares, rights and stapled securities acquired under an employee share scheme on or after 1 July 2009.

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

An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in:

(a) a share in the company; or

(b) a right to acquire a beneficial interest in a share in the company.

Section 83A-340(1) refers to indeterminate rights and provides that this section applies if you a beneficial interest in a right and the right later become a right to acquire a beneficial interest in a share. The section provides the following examples of an indeterminate right:

Example 1

You acquire a right to acquire, at a future time:

(a) shares with a specified total value, rather than a specified number of share; or

(b) an indeterminate number of shares.

Example 2

You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses.

Under the SOP rules you were entitled to an award expressed as a total number of shares. The number of shares to which you were entitled was not set until the board determined the maximum reward. Further as per clause 2 of the SOP rules the reward can be paid either as a combination of shares and cash payment or alternatively totally as a cash payment so that the key personnel can use the cash payment to purchase all or part of those shares earned through the plan.

Therefore as per subsection 83A-340(2) will apply as if the right had always been a right to acquire the beneficial interest in a share.

Requirements of Subdivision 83A-C

Subdivision 83A-C allows for the deferral of tax on the amount assessable in respect of an ESS interest if certain conditions are satisfied. Subdivision 83A-C will apply to the rights if the following conditions in section 83A-105 are satisfied:

(a) Subdivision 83A-B would, apart from section 83A-105, apply to the rights; and

(b) subsections 83A-35(3), (4), (5) and (9) apply to the rights; and

(c) there is a real risk that you will forfeit or lose the interest (other than by disposing of it, exercising the right or letting it lapse) pursuant to subsection 83A-105(3).

In relation to the first condition, section 83A-20 provides that Subdivision 83A-B would apply to an ESS interest which is acquired under an employee share scheme at a discount. Subdivision 83A-B will apart from subsection 83A-105(1), apply to the Right because the Right:

• is an ESS interest acquired under an employee share scheme, and

• is provided for nil consideration (that is, at a discount).

In relation to the second condition, subsections 83A-35(3), (4), (5) and (9) apply to each Right granted to you because:

• when the Right is acquired, you were employed by the X Group (subsection 83A-35(3));

• subsection 83A-35(4) applies to an ESS interest acquired under an employee share scheme if all of the ESS interests available for acquisition under the scheme relate to ordinary shares. As per the Commissioner's view in ATO ID 2010/62 the class B shares offered under the plan are ordinary shares in that there is no preferential entitlements to distributions of profit and capital on the winding up of the company;

• the requirement in subsection 83A-35(5) is satisfied as the predominant business of X is not the acquisition, sale or holding of shares, securities or other investments, directly or indirectly; and

• the requirement in subsection 83A-35(9) is satisfied as after the acquisition of the Rights, a you will not hold a beneficial interest in more than five per cent of the Securities in X nor be in a position to cast, or control the casting of, more than five per cent of the maximum number of votes that might be cast at a general meeting of X.

Real Risk of Forfeiture

In relation to the third condition, Subdivision 83A-C applies to a right if, under the conditions of the plan when the right is granted, there is a real risk that a Participant will forfeit or lose the right (other than by disposing of it, exercising the right or letting it lapse).

Real risk of forfeiture in a scheme may include conditions where retention of the ESS interests is subject to performance conditions or a minimum term of employment. In cases where an employee share scheme has both employment and performance conditions to be met, and one of these conditions satisfies the 'real risk of forfeiture' test, it is not necessary to consider whether the other condition also satisfies the test.

ATO ID 2010/61 provides the Commissioner's view on what constitutes a real risk of forfeiture in relation to minimum terms of employment and good leaver provisions. It provides that a condition imposing a minimum employment period of 12 months is considered to give rise to a more than a 'mere' or 'rare' possibility of forfeiture and to be a condition genuinely directed to retaining employees and aligning their interests with the interests of the company.

Under the plan rules if an employee ceases to be employed by the X before the right is exercised or within 15 months after the grant of shares they will forfeit their ESS interests. Consequently deferred taxation will apply and the value of the discount will need to be included in your taxable income at the deferred taxation point calculated under 83A-120.

ESS deferred taxing point

Section 83A-120 provides the rules for determining when the ESS deferred taxing point occurs where you are the holder of beneficial interest in a right. This will be the earliest of the following times:

• when the employment in respect of which you acquired the rights ends as per subsection 83A-120(5)

• seven years after acquiring the rights as per subsection 83A-120(6)

• when the right has not been exercised, there is no real risk of forfeiting the right, and the scheme no longer genuinely restricts disposal of the right as per subsection 83A-120(4)

• when there is no real risk of forfeiting the right or underlying share, and the scheme no longer genuinely restricts exercise of the right or disposal of the resulting share as per subsection 83A-120(7).

Consequently in your circumstances if you continue to be employed by the X group the deferred taxing point for the ESS interest received in x will be when the trading restriction on the X shares ends on the x.

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