Edited version of your written advice

Authorisation Number: 1051257694084

Date of advice: 27 July 2017

Ruling

Subject: Options - Do the Employee Share Scheme provisions apply?

Question 1

Are the $1.00 options subject to the Employee Share Scheme rules in Division 83A of the Income Tax Assessment Act 1997?

Answer

Yes

Question 2

Are the $2.00 options subject to the Employee Share Scheme rules in Division 83A of the Income Tax Assessment Act 1997?

Answer

No

Question 3

Is the gain on the disposal of the $2.00 options taxable as a capital gain?

Answer

Yes

This ruling applies for the following periods:

1 July 201Y to 30 June 201Z

The scheme commences on:

201X

Relevant facts and circumstances

You are an executive of the company.

The company was purchased by company B for an amount of money on a date in 201X. The company consolidated its share capital to a number of $1.00 shares on a later date in 201X.

The company established the Equity Plan on a date before 1 July 2015. On the same date the board offered a number of $1.00 and $2.00 options to you.

There were a number of conditions that needed to be met before the options would vest, restrictions on disposal and a real risk of forfeiture if you left the company before the options were exercised.

In mid 201Y company C made an offer to purchase the company for an amount of money per share. This triggered the vesting conditions for the $1.00 and $2.00 options. The options had not been exercised before this point. The options were cancelled and the cash value of the options was paid to you.

Assumption

The market value of the shares on a date in 201X when the options were issued was less than the options exercise price of $1.00 and $2.00.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Division 130

Income Tax Assessment Regulations 1997 Section 83A-315

Reasons for decision

Question 1

Summary

The $1.00 options meet the conditions of the Employee Share Scheme (ESS) rules and are subject to tax under Division 83A at the time the options were cancelled.

Detailed reasoning

Under an ESS regarding ESS interests issued between 1 July 2009 and 30 June 2015, when an employee receives an interest that is an interest to acquire shares (options) with a discount to market value, and there is a real risk of forfeiture of the interest, or a genuine restriction on disposal, the taxation of the receipt of the options will be deferred. The taxation point will be the earliest of:

● seven years after acquisition of the options;

● when the employee ceases the employment;

● when there is no longer a real risk of forfeiting the option and disposal is not restricted;

● and when there is no longer a real risk of forfeiting the option or underlying share and disposal of the option or underlying share is not restricted.

The $1.00 options were issued as part of an ESS, before 1 July 2015. There was a genuine restriction on disposal of the options as they were not tradable and could only be exercised when the specific vesting conditions were met. The options were also at real risk of forfeiture if you left the company before they were exercised. Using a market value for the shares of an amount, the $1.00 options had a positive value at the time of issue. You therefore acquired the options at a discount.

The earliest deferred taxation point occurred when the options vested and the company exercised its right to cancel the options and pay out the proceeds. This was in 201Y. Your assessable income for the 201Y income year should include the market value of the interest at the deferred taxing point reduced by the amount payable to exercise the options.

Question 2

Summary

The $2.00 options are not subject to the ESS provisions as they were issued with nil value and so do not meet the conditions set out in Division 83A.

Detailed reasoning

The options were issued prior to 1 July 2015, so the ESS provisions that were in effect between 1 July 2009 and 30 June 2015 will be the applicable rules. The $2.00 options will only be subject to taxation as ESS interests where you have been issued with the options at a discount. Whether there is a discount is worked out using the market value of the interest, or of the underlying security, on the day of issue. In turn, the market value of the options should be determined using the methods provided for in section 83A-315 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Where the market value of the underlying shares on the issue date is taken to be an amount, using either valuation methods from 83A-315 ITAR 1997 will give a nil value to the $2.00 options. Accordingly, the $2.00 options will not be subject to taxation under the ESS provisions.

Question 3

Summary

The gain on the cancellation of the $2.00 options will be taxable as a capital gain.

Detailed reasoning

Any gain you make on the cancellation of the $2.00 options will be taxable under the capital gains provisions. You will be taken to have acquired them on a date in 201X. You acquired the options with a zero value per Section 83A-315 of the Income Tax Assessment Regulations 1997. The cost base of the options will be the amount you were required to pay at the cancellation, $2.00 per option, plus any other costs incurred in acquiring, holding or disposing of the options. As you have held the options for more than 12 months you will be eligible to apply the 50% CGT general discount to this gain.

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