Edited version of your written advice

Authorisation Number: 1012948860208

Date of advice: 4 February 2016

Ruling

Subject: Employee share scheme - Options - Cash out due to merger

Question 1:

Is any part of the equity payout to be included in your assessable income as ordinary income?

Answer:

No.

Question 2:

Is any part of the equity payout to be included in your assessable income as an employee share scheme discount?

Answer:

Yes.

Question 3:

Is any part of the equity payout considered to be capital proceeds for the purposes of the capital gains provisions?

Answer:

Yes.

This ruling applies for the following period:

20XX-XX income year

The scheme commences on:

1 July 200X

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.

During the relevant income year, you were an executive of a wholly owned Australian subsidiary of a foreign company.

As part of your tenure at the Australian subsidiary, you were entitled to receive stock options in the foreign company as part of your remuneration. Relevant grants were made under various Long-Term Incentive Plans.

Stock Appreciation Rights

You were granted one parcel of Stock Appreciation Rights before 1 July 2009 and three parcels after 30 June 2009.

The Stock Appreciation Rights gave you the right to receive a bonus equal to the increase in the share price between the grant date and the exercise date multiplied by the number of Stock Appreciation Rights granted to you.

The Long-Term Incentive Plans allowed for the bonus to be paid in the form of cash or shares. The Compensation Committee had chosen to pay the bonus to you as shares.

The Stock Appreciation Rights could not be exercised until they vested and were to expire ten years after they were granted. You were to lose the Stock Appreciation Rights if your employment ended before they vested.

The vesting schedule provided that the Stock Appreciation Rights vested as follows:

• One third after 12 months

• Second third after 24 months

• Final third after 36 months

Non-qualified Stock Options

You were granted Non-qualified Stock Options after 1 July 2009.

The Non-qualified Stock Options gave you the right to acquire shares at a set exercise price.

The Non-qualified Stock Options could not be exercised until they vested and were to expire ten years after they were granted. You were to lose the Non-qualified Stock Options if your employment ended before they vested.

The vesting schedule provided that the Non-qualified Stock Options vested as follows:

• One third after 12 months

• Second third after 24 months

• Final third after 36 months

Performance Shares

You were granted Performance Shares after 1 July 2009.

Basically, the Performance shares are Restricted Stock Units that are subject to performance conditions as well as time based vesting conditions.

The Performance Shares were to be automatically exercised once they vested without you having to pay any exercise price. You were to lose the Performance Shares if your employment ended before they vested.

The vesting schedule provided that the Performance Shares vested as follows:

• One third after 12 months if Year 1 Return on Capital Employed test met

• Second third after 24 months if Year 2 Return on Capital Employed test met

• Final third after 36 months if Year 3 Return on Capital Employed test met

The Year 1 Return on Capital Employed test was not met. As such, none of the restricted stock units vested based on the Year 1 performance.

The takeover

In 20XX, there was an executed merger between the foreign company and another foreign company. One of the provisions of the merger was to payout all stock that had been issued in exchange for a cash payment.

You received your equity payout with your pay in 20XX with tax deducted at the rate of 46.5%. This payment has also been included on your payment summary for that income year.

The amount of your equity payout was calculated in the foreign currency and then converted to Australian currency at the time of payment.

A letter from the foreign company explained the basis of your equity payout and related it to each of the cancelled Stock Options described above.

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

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 15-2,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1997 Subdivision 130-D,

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

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

Reasons for decision

Summary

No part of the equity payout is to be included in your assessable income as ordinary income.

Certain specified parts of the equity payout are to be included in your assessable income as employee share scheme discounts.

The remaining parts of the equity payout are considered to be capital proceeds for the purposes of the capital gains provisions as the deferred taxing point occurred before they were cancelled.

However, three parts of the equity payout do not qualify for the 50% CGT discount as the deferred taxing point also occurred during the relevant income year (and have been held for less than 12 months for capital gains purposes)

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 or rights as remuneration

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

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

The employee share scheme provisions were re-written in 200X with the new provisions applying to shares or rights to acquire shares granted on or after 1 July 2015 and a combination of the old and new provisions applying to grants before that date that hadn't reached their taxing point by 30 June 2009.

Stock Appreciation Rights -Grant before 1 July 2009

The Stock Appreciation Rights provided you with the right to acquire ordinary shares.

This grant occurred before the employee share scheme provisions were re-written with effect from 1 July 2009.

The former employee share scheme provisions operated in the following manner:

• The employee share scheme provisions applied if the rights were granted at a discount to their market value (calculated as at the grant date)

• The rights qualify for tax deferral if they are 'qualifying rights'. Otherwise, they are assessable as at the grant date

• The rights are qualifying rights if the following conditions are met:

• The rights are granted under an employee share scheme

• The rights are granted in a company that is your employer, or a holding company of your employer

• The rights are rights to acquire ordinary shares

• You do not hold a legal or beneficial interest in more than 5% of the shares in the company, and

• You are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

• You could choose to make the discount assessable as at the grant date

• The rights are assessable at the 'cessation time' if you don't choose to be assessable as at the grant date

• The cessation time for each right is the earliest of the following:

• The time when you disposed of the right (other than by exercising it)

• 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 any share acquired by exercising the right

• If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

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

None of the potential cessation times occurred before 30 June 2009.

The cessation time continues to be the basis of the deferred taxing point under the re-written employee share scheme provisions.

The Stock Appreciation Rights are qualifying rights and you did not choose to make them assessable as at the grant date. Therefore, they are assessable to you at the cessation time.

The first potential cessation time to occur was when you disposed of them in 20XX. The assessable amount is the amount you received for their disposal.

Stock Appreciation Rights - Other Grants

These grants occurred after the employee share scheme provisions were re-written with effect from 1 July 2009.

The re-written employee share scheme provisions operated in the following manner:

• The employee share scheme provisions applied if the rights were granted in a company that is your employer, or a holding company of your employer at a discount to their market value (calculated as at the grant date)

• The rights qualify for tax deferral if the following conditions are met:

• The rights are granted under an employee share scheme

• The rights are granted in a company that is your employer, or a holding company of your employer

• The rights are rights to acquire ordinary shares

• The company is not a certain type of share trading or investment company

• You do not hold a legal or beneficial interest in more than 5% of the shares in the company

• You are not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company, and

• The rights (or any shares acquired by exercising the rights) were at a real risk of forfeiture when they were granted.

• The deferred taxing point for the rights is the earliest of the following:

• The earliest time that the rights are not at a real risk of forfeiture and any selling restrictions on them are lifted

• The time when your employment with a relevant employer ceased

• The earliest time that the rights are not at a real risk of forfeiture, any exercise conditions are lifted, any share you acquire by exercising the rights are not at a real risk of forfeiture and any selling restrictions on any share acquired by exercising the right are lifted

• seven years from the date of grant of the right.

These Stock Appreciation Rights meet the conditions to qualify for tax deferral.

The deferred taxing point for these Stock Appreciation Rights that vested before they were cancelled occurred at the vesting date (subject to any share trading restrictions that apply to you) as it was the first potential deferred taxing point to occur. (It is the third dot point.)

The capital gains provisions apply to the vested Stock Appreciation Rights for the period from the vesting date (as adjusted by any share trading restrictions) to the cancellation date. The first element of their cost base is their market value on this date.

The deferred taxing point for these Stock Appreciation Rights that were cancelled before they vested is the cancellation date as no other potential deferred taxing point occurred earlier. (It is the first dot point.)

Any capital gain or capital loss you make due to the cancellation of the unvested Stock Appreciation Rights is disregarded to avoid double taxation as the whole of the cancellation receipt is assessable under the employee share scheme provisions.

Note: The Stock Appreciation Rights that vested earlier in 20XX will have been held for less than 12 months for capital gains purposes by the cancellation date and so will not qualify for the 50% capital gains discount. The employee share scheme discount on these grants is also assessable in the same income year.

Non-Qualified Stock Options

This grant occurred after the employee share scheme provisions were re-written with effect from 1 July 2009. One third of these Non-qualified Stock Options vested before they were cancelled.

The re-written employee share scheme provisions apply to the Non-qualified Stock Options in the same manner as described for the other grants of Stock Appreciation Rights.

The deferred taxing point for the Non-qualified Stock Options that vested before they were cancelled occurred at the vesting date (subject to any share trading restrictions that apply to you) as it was the first potential deferred taxing point to occur.

The capital gains provisions apply to the vested Non-qualified Stock Options for the period from the vesting date (as adjusted by any share trading restrictions) to the cancellation date. The first element of their cost base is their market value on this date.

The deferred taxing point for the Non-qualified Stock Options that were cancelled before they vested is the cancellation date as no other potential deferred taxing point occurred earlier.

Any capital gain or capital loss you make due to the cancellation of the unvested Non-qualified Stock Options is disregarded to avoid double taxation as the whole of the cancellation receipt is assessable under the employee share scheme provisions.

Note: The Non-qualified Stock Options that vested earlier in 20XX will have been held for less than 12 months for capital gains purposes by the cancellation date and so will not qualify for the 50% capital gains discount. The employee share scheme discount on these grants is also assessable in the same income year.

Performance Shares

This grant occurred after the employee share scheme provisions were re-written with effect from 1 July 2009. None of the Performance Shares vested before they were cancelled.

The re-written employee share scheme provisions apply to the Performance Shares in the same manner as described for the other grants of Stock Appreciation Rights

The deferred taxing point for the Performance Shares is the cancellation date as no other potential deferred taxing point occurred earlier.

Any capital gain or capital loss you make due to the cancellation of the unvested Performance Shares is disregarded to avoid double taxation as the whole of the cancellation receipt is assessable under the employee share scheme provisions.

Ordinary income

The employee share scheme provisions modify the operation of the remainder of the income tax provisions so that you are considered to have acquired each of the above mentioned grants for its market value at the deferred taxing point.

Consequently, you have not received a discount on any of these grants for the purpose of determining if there is any ordinary income in relation to them. This means that there is no benefit in relation to these grants that could constitute ordinary income.

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