Edited version of your written advice

Authorisation Number: 1012907229170

Date of advice: 11 November 2015

Ruling

Subject: Employee share scheme - Options - Date of grant

Question:

Is the acquisition date of the options after 30 June 2015?

Answer:

Yes.

This ruling applies for the following period<s>:

2014-15 income year

2015-16 income year

2016-17 income year

2017-18 income year

2018-19 income year

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You recently commenced working for a private foreign company.

You have been offered the opportunity to participate in an employee share scheme that grants you options to acquire shares in the company at an exercise price that is the fair market value of the shares at the nominated 'date of grant'.

The options progressively vest over three years between 12 months and 48 months of continuous service as long as you remain an employee of the company at the time of vesting.

The stock option grant form shows a nominated 'date of grant'. You have not yet signed the agreement.

You understand that the offer does not provide for any alternate form of reward that might indicate that you have already received indeterminate rights. Instead, the Agreement indicates that the options are an 'extraordinary compensation' outside the scope of your employment contract.

The company is currently a private company and the options themselves and any shares acquired by exercising the options are not currently tradeable. The stock option agreement specifies that the exercise price per share is at least 100% of the fair market value of the shares at the 'date of grant' as determined by the company's board of directors.

Certain documents provided as part of your request are to be read with and form part of the description of the scheme for the purpose of this ruling.

One such document, the Stock Option Grant letter states in part:

'Subject to the approval of the Company's board of directors, and your execution and acceptance of the corresponding grant notice / stock option agreement, you will be awarded a one-time grant of a stock option to purchase [number deleted] shares of the Company's common stock with an exercise price equal to the fair market value of the Company's common stock on the date of grant, as determined by the Company's board of directors.'

Assumption

For the purpose of this private ruling, you will sign and return the relevant documents after 1 July 2015.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Tax and Superannuation Laws Amendment (Employee Share Schemes) Act 2015 Section 44

Reasons for decision

Summary

The acquisition date of the options is after 30 June 2015.

Detailed reasoning

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:

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

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

3. 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

The application of the employee share scheme provisions have recently been changed with the change applying to shares or rights to acquire shares acquired on or after 1 July 2015.

The date that you acquire rights to acquire shares is not defined for employee share scheme purposes.

Therefore, the acquisition date for rights to acquire shares is determined in accordance with common law principles.

Lee J stated in Fraunschiel v. Federal Commissioner of Taxation 89 ATC 4616 at page 4634 that:

A right to acquire shares would be a right such as that contained in an option to purchase. It matters not whether an option agreement is regarded as an irrevocable offer or a conditional contract (see Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 CLR 57), the right to acquire the property the subject of the option is an enforceable right to acquire pending actual acquisition by exercise of the option. In contrast, the right to accept an offer has no enforceable quality attached to it. The offer may be withdrawn or revoked and the right to accept vanishes with the destruction of the offer. The fact that the property may be acquired by the acceptance of the offer does not make the right to accept a right to acquire.

At present, you merely have the right to accept the offer that has been presented to you. You do not currently have any right to acquire a beneficial interest in shares in the company.

You will have the right to acquire a beneficial interest in shares in the company once you have agreed to accept the offer as all of the other requirements for the grant of the rights have already been met.

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