Edited version of your written advice

Authorisation Number: 1012896977176

Date of advice: 20 October 2015

Ruling

Subject: ESS - shares - Deferral share plan

Question 1:

Will the Commissioner allow you additional time to make an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936) for the 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 income years?

Answer:

No.

Question 2:

Can the taxing point and calculation of the amount of your employee share scheme discount be deferred until you sell the shares?

Answer:

No.

This ruling applies for the following period<s>:

2004-05 income year

2005-06 income year

2006-07 income year

2007-08 income year

2008-09 income year

2014-15 income year

The scheme commences on:

1 July 2004

Relevant facts and circumstances

You were an employee of your employer until you were retrenched due to a restructure.

During your time with your employer, you were granted a number of shares under their Deferral Share Plan (DSP). Generally, these shares were to be subject to certain restrictions including selling restrictions for up to ten years from the grant date or until your employment ended.

The operation of the DSP is further explained in the Class Ruling.

You received the DSP shares in lieu of bonuses after choosing this mode of payment.

You lodged your income tax returns for the relevant years within the standard lodgement timeframe without declaring any amounts in respect of the shares granted to you under the DSP.

You did not make an election under section 139E of the ITAA 1936 in respect of any of these income years either.

You have received an employee share scheme statement for the 20XX-YY income years advising the amounts that were assessable to you as employee share scheme discounts under the DSP and how they were determined.

The employee share scheme statement advised that there were no employee costs in relation to the DSP.

Any remaining selling restrictions and forfeiture conditions were removed when your employment ended.

The employee share scheme statement is to be read with and forms part of the description of the scheme for the purpose of this ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A,

Income Tax (Transitional Provisions)Act 1997 Division 83A and

Income Tax Assessment Act 1936 Division 13A of Part III.

Reasons for decision

Question 1

Summary

The Commissioner will not allow you additional time to make an election under section 139E of the ITAA 1936 for the relevant income years.

Detailed reasoning

Employee share scheme

Division 13A of Part III of the ITAA 1936 contained the employee share scheme provisions that applied between 1995 and 30 June 2009 and provided that an employee acquires shares, under an employee share scheme if they were acquired in respect of or in relation directly or indirectly to the employment of the employee and were issued at a discount.

Further, Division 13A of Part III of the ITAA 1936 allowed a taxpayer who acquired qualifying shares to make a written section 139E election to include the discount in their assessable income in the year of acquisition up to the 2007-08 income year.

A modified section 139E election applied for the 2008-09 income year and the election had to be made on the income tax return lodged for that year.

The written election had to be made before, or at the time of lodgement of the tax return of the relevant income year, or within such further time as the Commissioner allows.

Application to your case

You were granted various employee shares between 2004 and 2009. As you did not make a section 139E election by the time you lodged your income tax return for each of these income years, you have requested that the Commissioner's discretion be exercised to allow you to make late elections.

When considering if an extension of time should be granted, the Commissioner will treat each case and each income year on its own merits and consider the following factors:

• the circumstances which led to the taxpayer not making the election prior to the lodgement of their income tax return for the relevant income year 

• the taxpayers explanation of the time delay between the date of lodgement of the income tax return and the date of the late election, and  

• whether is it fair and equitable in the circumstances for the Commissioners discretion to be exercised

Even in the absence of a reasonable explanation, the Commissioner must still look at all the circumstances in deciding whether it would be fair and equitable to exercise the discretion (Comcare v AHearn (1993) 119 ALR 85). That involves balancing all relevant factors on the basis that the legislation gives the Commissioner discretion to accept a late election in certain circumstances (Brown v FCT (1999) 42 ATR 118).

Having reviewed all your circumstances, we consider it is not appropriate to exercise the Commissioners discretion to accept your late elections as:

• there has been a significant time delay from the date you lodged your income tax returns until the time in which you requested the Commissioner's discretion, which is not considered reasonable

• you would be aware of the extent to which the share price has varied and the different amounts that would be included in your assessable income at both the grant date and at each potential cessation time

• granting you additional time to make this election would provide you with an unfair advantage over other taxpayers who have made their choice at the required time

• you have not disclosed any issues in relation to the granting of the shares that hindered your ability to make these elections at the required time

• you have not advised of any special circumstances such as serious family or health problems or a natural disaster which prevented you from making the section 139E election at the required time

• being unfamiliar with the employee share scheme provisions is not a reason for the Commissioner to exercise this discretion

• you should have received detailed information at the time the shares were allocated to you as part of the employee share scheme

• The Class Ruling about the Commissioner's view on the operation of the employee share scheme provisions to this employee share scheme was issued by the Commissioner before you lodged any of the abovementioned income tax returns

• you could have completed your own research before lodging any of these income tax returns and found the Class Ruling and used it to guide your choices

• you could have searched for other information about the operation of employee share schemes - at that time, a document titled 'Employee share schemes - answers to frequently asked questions by employees' was also available on the ATO website

• you could have searched for information about the operation of this employee share scheme on your employer's systems, and

• you do not appear to have sought tax advice from a professional agent before choosing to receive these shares or completing your income tax return. A prudent taxpayer would have checked about these ramifications before acting

Therefore, your request for additional time to make an election under section 139E of the ITAA 1936 for the relevant year's income tax returns has been refused.

Cessation time

You will need to include the discount on your shares in your assessable income in the income year in which cessation time occurs.

Question 2

Summary

The taxing point and calculation of the amount of your employee share scheme discount cannot be deferred until you sell the shares. Instead, the taxing point occurred when the shares were released from the selling restrictions. For most of the shares, this occurred on the date your employment ended.

Detailed reasoning

The income tax provisions apply to earned amounts on the basis of there being a substantive receipt of earnings irrespective of the form that the taxpayer receives those amounts or benefits from them and irrespective of whether the taxpayer receives them directly or indirectly (meaning they are paid to someone else).

The income tax provisions apply to all components of an individual taxpayer's remuneration package; however, there are some differences in the tax treatment depending on the form that the remuneration is paid (which might be salary or wages, non-cash benefits or superannuation).

There are specific 'employee share scheme' provisions for grants of shares (and rights to acquire shares) to reflect the dual nature of such grants.

The employee share scheme provisions are used to determine when the employment aspect of a grant of shares (or rights to acquire shares) should be considered to end and the investment aspect commence.

The mechanism used by the employee share scheme provisions to achieve this outcome is based on three principles:

• Determine an appropriate point in time to treat the grant as being earned for remuneration purposes

• Calculate an amount as the value of the discount received that represents remuneration and include it as assessable income, and

• Modify the capital gains tax provisions to avoid double taxation

The 'appropriate point in time' is intended to represent a compromise between:

• The grant of shares as remuneration

• The employee's ability to exploit their ownership of the shares (including sell them or transfer them to associates), and

• The need to counter arrangements that attempt to manipulate the taxing point

For example, only ordinary shares (or rights to acquire ordinary shares) can qualify for tax deferral.

The effect of this process for an individual is the equivalent of them receiving a cash amount at the 'taxing point' (which is assessable to them) and then using that cash amount to purchase the shares or rights to acquire shares for their market value as an investment.

Note: for employee share scheme purposes, you are not considered to have paid for shares if you receive them in place of cash entitlements (including bonuses).

Determining the cessation time or deferred taxing point for qualifying shares

Qualifying shares granted between 1995 and 30 June 2009 were automatically subject to tax deferral unless a valid section 139E election was made for the income year they were granted.

For each qualifying share, the employee share scheme provisions define the 'cessation time' as the earliest of:

• The time when you disposed of the share

• The time when your employment with a relevant employer ceased

• The later of the time when any selling restrictions end and any forfeiture conditions cease on the share, or

• 10 years from the date of grant of the option.

This cessation time is also the deferred taxing point for qualifying shares under the re-written employee share scheme provisions that apply from 1 July 2009.

The 1995 amendments introduced a ten year time limit as well as the continuing employment requirement to counter certain deferral schemes that were operating under the former incarnation of the employee share scheme provisions.

It was the intention of the Parliament that tax deferral cease if either of these potential cessation times occurred even if the shares continued to be subject to selling restrictions or forfeiture conditions.

The Commissioner does not have any discretion to alter or defer your deferred taxing point or the cessation time.

The employee share scheme statement provided to you by your employer means that the employee share scheme provisions apply to you in the following manner and for the following reasons:

• You were granted shares in relation to your employment before 1 July 2009 at a discount to their market value

• These shares were qualifying shares and therefore the taxing point was to be deferred until the cessation time

• The cessation time for the first parcel of shares happened on (a specified date) because they were 'released' from the selling restrictions (a few days before the tenth anniversary of the grant)

• The cessation time for the remaining parcels of shares happened on (your termination date) because your employment ended on this date and because they were released from the selling restrictions

While the sale date of the shares was a potential cessation time under the employee share scheme provisions, it was not the first potential cessation time that occurred in your case.

As stated above, the deferred taxing point and cessation time for each grant of shares under the DSP occurred when they were released from the selling restrictions. From this day forward, you had the right to sell the DSP shares but have chosen not to.

For most of the parcels, a second potential deferred taxing point and cessation time being the termination of your employment also occurred on the same day they were released from the selling restrictions.

The employee share scheme statement provided to you by your former employer correctly explains the operation of the employee share scheme provisions to you for the 20XX-YY income year.

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