Edited version of your written advice

Authorisation Number: 1051352424739

Date of advice: 27 March 2018

Ruling

Subject: Employee share scheme – reporting obligation

Question

Where you provide Units to your Australian resident employees under the ‘Unit Agreement’ and in accordance with the ‘ Incentive Plan’, do you have a reporting obligation under Division 392 of the Taxation Administration Act 1953 (TAA), and if so at what time does a reporting obligation arise?

Answer

A reporting obligation arises for a financial year in which Participants are provided with Units under the ‘Unit Agreement’ and in accordance with the ‘Incentive Plan’. The reporting obligation arises under paragraph 392-5(1)(a) of the TAA.

A further reporting obligation arises for the financial year in which the Units vest. Under the ‘Unit Agreement’ and in accordance with the ‘Incentive Plan’ the vesting time of the Units is the ESS deferred taxing point for the Units under subsection 83A-120(7) of the Income Tax Assessment Act 1997 (ITAA 1997) unless the share acquired is disposed of within 30 days of the vesting time, in which case the disposal date becomes the deferred taxing point in accordance with subsection 83A-120(3) of the ITAA 1997. The reporting obligation arises under paragraph 392-5(1)(b) of the TAA.

Where a Participant ceases employment and as a consequence forfeits his or her Units or otherwise forfeits them, then a further reporting obligation may arise under section 392-10 of the TAA provided that the original acquisition had been previously reported.

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 November 2009

Relevant facts and circumstances

The taxpayer received a private binding ruling from the Commissioner previously.

The taxpayer applied to extend the previous ruling and confirmed that the scheme remain the same.

The taxpayer is a wholly owned Australian subsidiary of a foreign listed corporation.

The taxpayer’ parent company (the company) created the Incentive Plan to advance the interests of the company’s stockholders by enhancing the ability of the company to attract, retain and motivate persons who are expected to make important contributions to the company and by providing such persons with equity ownership opportunities and performance-based incentives that are intended to better align the interests of such persons with those of the company’s stockholders.

All of the company’s employees, officers, and directors (including employees etc. of its Australian subsidiary) are eligible to be granted units and other stock and cash based awards under the Plan.

The Plan will be administered by the Board of the company (the Board). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable.

To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board.

Restricted Stock Units

The Board may grant Awards entitling the Participant to receive shares of common stock or cash to be delivered at the time that such Award vests (Units). Australian Participants will only receive shares of common stock (and not cash) when their Units vest.

Forfeiture

If the Participant ceases to be employed by the company for any reason or no reason, with or without cause, before the Units vest, all of the Units that are unvested at the time of such employment termination shall be immediately forfeited to the company.

Grant of Units

The Granting of Units to Australian Participants is governed by the terms of the “Unit Agreement”. Units are granted at the sole discretion of the Board.

Each Unit represents the right to receive one share of common stock ($1.00 par value per share). The Participant agrees that the Units shall be subject to the vesting conditions set forth in the agreement.

Units are granted for nil consideration.

Vesting Conditions

Provided that the Participant remains employed by the company on the occurrence of the following events or dates, the Units will vest as follows:

(a) 33 1/3 % of the original number of Units on the first anniversary of the date of this Agreement (the “Grant Date”) and an additional 33 1/3 % of the original number of Units at the end of each successive 12-month period following the first anniversary of the Grant Date until the third anniversary of the Grant Date.

(b) If the Participant’s employment is terminated due to their death or total disability as determined under the company’s long term disability program, the Participant’s unvested Units become 100% vested as of his or her last day of employment.

(c) If the Participant’s employment is terminated without Cause, or if the Participant resigns for Good Reason, in each case within twelve months after the consummation of a Change of Control Event (regardless of whether such event also constitutes a Reorganisation Event as defined in the Plan), and if he or she was employed by the company on the effective date of such Change in Control Event, then the Participant’s unvested Units become 100% vested as of his or her last day of employment.

Transfer Restrictions

The Participant cannot sell, assign, transfer, pledge or otherwise dispose or encumber the Units granted.

Australian participants receiving Units under the Incentive Plan on or after 1 July 2015 will not, immediately after they acquire the ESS interest, hold a beneficial interest in more than 10% of the shares or be in a position to cast or control the casting of more than 10% of the votes in the company, taking into account and including the company shares that they can acquire by exercising any rights they have over the shares and the holdings of their associates.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Division 392

Income Tax Assessment Act 1997 Division 83A

Reasons for decision

Detailed reasoning

Division 392 of Schedule 1 to the TAA

Division 392 of Schedule 1 to the TAA relates to employee share scheme reporting.

Subsection 392-5(1) provides that an entity (the provider) must give a statement to the Commissioner and to an individual for a financial year if:

(a) both of the following subparagraphs apply:

(i) the provider provides ESS interests to the individual during the year;

(ii) Subdivision 83A-B or 83A-C of the ITAA 1997 applies to the interests; or

(b) all of the following subparagraphs apply:

(i) the provider has provided ESS interests to the individual (whether during the year or during an earlier year);

(ii) Subdivision 83A-C of the ITAA 1997 applies to the interests;

(iii) the ESS deferred taxing point for the interests occurs during the year.

Subsection 392-10(1) requires that if the provider becomes aware of a material change or material omission in any information given to the individual or the Commissioner under Division 392, the provider must:

(a) tell the individual or the Commissioner of the change in the approved form; or

(b) give the omitted information to the individual or the Commissioner in the approved form.

Division 83A of the ITAA 1997

Division 83A of the ITAA 1997 relates to the taxation of discounts received and gains made on ESS interests acquired under employee share schemes on or after 1 July 2009.

Section 83A-10 provides that:

● An ESS interest in a company includes a beneficial interest in a right to acquire a beneficial interest in a share in the company.

● An employee share scheme is a scheme under which ESS interests in a company are provided to employees of the company or subsidiaries of the company in relation to the employees' employment.

Subdivision 83A-B of the ITAA 1997 includes a discount received by a taxpayer on an ESS interest they acquire under an employee share scheme in their assessable income for the financial year in which they acquire the interest.

Section 83A-20 of the ITAA 1997 provides that Subdivision 83A-B applies to an ESS interest if a taxpayer acquires the interest under an employee share scheme at a discount.

Note 1 to section 83A-20 provides that Subdivision 83A-B does not apply if Subdivision 83A-C applies.

Subdivision 83A-C of the ITAA 1997 includes a gain made by a taxpayer on an ESS interest they acquire under an employee share scheme in their assessable income for the financial year in which the ESS deferred taxing point for the interest occurs.

Section 83A-105 of the ITAA 1997 provides that Subdivision 83A-C applies and Subdivision 83A-B does not apply to an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share if all of the following conditions are satisfied:

● Subdivision 83A-B would apart from this section apply to the interest.

● Paragraphs (aa) and (ab) of subsection 83A-105(1) are satisfied.

● When the taxpayer acquires the interest they are employed by the company or a subsidiary of the company.

● When the taxpayer acquires the interest all the interests available for acquisition under the employee share scheme relate to ordinary shares.

● When the taxpayer acquires the interest the predominant business of the company is not the acquisition, sale or holding of shares, securities or other investments.

● Immediately after the taxpayer acquires the interest they do not hold a beneficial interest in more than 10% of the shares in the company and are not in a position to cast or control the casting of more than 10% of the maximum number of votes that might be cast at a general meeting of the company (taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares (subsection 83A-45(7)) and the holdings of their associates (83A-305(2)).

● When the taxpayer acquires the interest either:

● there is a real risk that under the conditions of the scheme they will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse) or forfeit or lose the beneficial interest in the share (other than by disposing of it); or

● the scheme genuinely restricted the taxpayer immediately disposing of the right and the governing rules of the scheme expressly stated that subdivision 83A-C applies to the scheme.

Section 83A-120 of the ITAA 1997 provides that:

The ESS deferred taxing point for an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share is the earliest of the following times:

The first possible taxing point is the earliest time when:

(a) the taxpayer has not exercised the right;

(b) there is no real risk that, under the conditions of the employee share scheme, the taxpayer will forfeit or lose the interest (other than by disposing of it, exercising the right or letting the right lapse); and

(c) if at the time the taxpayer acquired the interest, the scheme genuinely restricted them from immediately disposing of it - the scheme no longer restricts them.

The second possible taxing point is the time when the employment in respect of which the taxpayer acquired the interest ends.

The third possible taxing point is the end of the 15 year period starting when the taxpayer acquired the interest.

The fourth possible taxing point is the earliest time when:

(a) you exercise the right; and

(b) there is no real risk that, under the conditions of the scheme, the taxpayer will forfeit or lose the beneficial interest in the share (other than by disposing of it); and

(c) if at the time the taxpayer acquired the interest, the scheme genuinely restricted them from immediately disposing of the beneficial interest in the share - the scheme no longer restricts them.

However, the ESS deferred taxing point for the interest is the time the taxpayer disposes of the interest (other than by exercising the right) or the beneficial interest in the share if that time occurs within 30 days after the time worked out above: subsection 83A-120(3).

Section 83A-315 of the ITAA 1997 provides that if the regulations specify an amount in relation to an ESS interest, that amount should be used instead of the market value of the interest in working out:

(a) whether there is a discount given in relation to the interest; and

(b) if so – the amount of the discount.

Regulations 83A-315.01 to 83A-315.09 of the Income Tax Assessment Regulations (ITAR) 1997

Regulations 83A-315.01 to 83A-315.09 of the ITAR 1997 relate to the determination of the value of an unlisted right for the purposes of Division 83A of the ITAA 1997.

Regulation 83A-315.01 provides that

For subsection 83A-315 of the ITAA 1997, the amount, in relation to an unlisted right that must be exercised within 15 years after the day when the beneficial interest in the right was acquired is at the choice of the individual the market value of the right or the amount determined by the application of regulations 83A-315.02 to 83A-315.09.

However, if the ESS deferred taxing point for an ESS interest is the day when the individual disposes of the interest (other than by exercising the right) or the beneficial interest in the share, the amount is the market value of the right or share.

Regulation 83A-315.02 of the ITAR 1997 provides that if a right is not quoted on an approved stock exchange on a particular day, the value of the right is the greater of:

(a) the market value on the day of the share that may be acquired by exercising the right less the lowest amount that must be paid to exercise the right; and

(b) the value determined in accordance with regulations 83A-315.05 to 83A-315.09.

Discount

The term 'discount' is not defined in the ITAA 1997. However, paragraph 1.102 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states ‘The discount is the market value of the ESS interests less any consideration paid or to be paid by the employee’.

Real risk of forfeiture or loss

ATO Interpretative Decision ATO ID 2010/61: real risk of forfeiture - minimum term of employment and good leaver provisions provides that when an employee acquires rights under an employee share scheme there is a real risk that under the conditions of the scheme the employee will forfeit or lose the rights if they cease employment before the vesting date of the rights where that date is 12 months or more from the date the rights were granted.

Changes to the legislation

This detailed reasoning reflects amendments made to the Income Tax Assessment Act 1997, pursuant to the Tax and Superannuation Laws Amendment (Employee Share Schemes) Act 2015 (105 of 2015), in respect of the taxation of employee shares schemes. These changes apply to ESS interests acquired on or after 1 July 2015 but for the insertion of paragraph 83A-105(1)(aa) which is applicable to assessments for the 2011-12 income year and later income years.

Application to your circumstances

The taxpayer will have reporting obligations under Division 392 of Schedule 1 to the TAA in relation to the Units issued to the Participants if they are ESS interests for the purposes of Division 83A of the ITAA 1997 and Subdivision 83A-B or 83A-C of the ITAA 1997 applies to them.

The Participants acquired the Units after 1 July 2009. The Units are rights to acquire shares in the company. The Participants are employees of the taxpayer. The taxpayer provided the Units to the Participants in relation to their employment. Hence, the Participants acquired the Units under an employee share scheme. Therefore, the Units are ESS interests for the purposes of Division 83A of the ITAA 1997.

Subdivision 83A-B or 83A-C of the ITAA 1997 will apply to the Units if they represent ESS interests acquired by the individual under an employee share scheme at a discount.

As indicated above, the Units represent ESS interests acquired by the individual under an employee share scheme.

The discount (if any) received on an ESS interest is the market value of the interest at the acquisition date less the acquisition cost of the interest.

All the Units are unlisted and are acquired for nil consideration. The Units automatically exercise upon vesting and there is no exercise price. For purposes of subsection 83A-315 of the ITAA 1997, the amount is, at the choice of the individual, the market value of the right or the amount determined by the application of regulations 83A-315.02 to 83A-315.09. The market value of the right is therefore either its objectively determined market value, the market value of the share or the amount determined by using the regulation tables.

As the exercise price of the Units is nil the market value of the right is likely to be the market value of the share on the day. Under either methodology the market value of the right is greater than zero and therefore the Units are acquired at a discount. Therefore at the time the Units are acquired either Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 applies to them and therefore the provider has a reporting obligation under paragraph 392-5(1)(a) of the TAA 1953.

Subdivision 83A-C of the ITAA 1997 will apply to the Units as all of the applicable conditions in subsection 83A-105(1) are met.

The condition in paragraph 83A-105(1)(a) of the ITAA 1997 is met because the RSUs are acquired under an employee share scheme and at a discount.

The conditions in paragraphs 83A-105(aa) and (ab) are met.

The conditions in paragraph 83A-105(1)(b) of the ITAA 1997 are met because:

(i) each of the Participants is employed by the company or its Australian subsidiary [83A-45(1)];

(ii) the RSUs relate to the common stock (i.e. ordinary shares) of the company [83A-45(2)];

(iii) the Participants are not employed by a company whose predominant business is the acquisition, sale or holding of shares, securities or other investments [83A-45(3)]; and

(iv) none of the Participants will at a time immediately after acquisition of the Units hold a beneficial interest in more than 10% of the shares in the company nor will they be in a position to cast, or control the casting of, more than 10% of the shares in the company [83A-45(6)] taking into account and including any shares and any voting rights that they would have by exercising any rights they have over shares (subsection 83A-45(7)) and the holdings of their associates (83A-305(2)).

The condition in paragraph 83A-105(1)(d) is met because subsection 83A-105(3) applies to the Units. When the Participant acquired the Units there was a real risk that they would forfeit or lose them before the dates they vested which were at least 12 months (i.e. 12, 24 or 36 months) or more from the date they were granted. ATO ID 2010/61 supports this view.

The ESS deferred taxing points for the Units are the dates on which they vested [subsection 83A-120(7) of the ITAA 1997] or in the event that the shares acquired at vesting were disposed of within 30 days, then the disposal date becomes the deferred taxing point [subsection 83A-120(3)]. A deferred taxing point cannot arise under subsections 83A-120(4), or (6) for the following reasons:

● Subsection 83A-120(4) cannot apply because Participants cannot dispose of the Units at any time.

● Subsection 83A-120(6) cannot apply because a deferred taxing point will arise at the latest after 3 years under subsection 83A-120(7)

Although subsection 83A-120(5) of the ITAA 1997 could theoretically apply because a Participant could cease employment prior to the vesting date, the effect of the Plan Rules is that upon cessation of employment the Units will either vest on the last day of employment or will be forfeited. Should they vest the deferred taxing point would arise under either subsection 83A-120(7) or subsection 83A-120(3). Should they be forfeited the Units would be treated as never having been acquired in accordance with section 83A-310.

Subsection 83A-120(7) of the ITAA 1997 will therefore apply unless subsection 83A-120(3) applies. Subsection 83A-120(7) will apply because at the vesting time, which is taken to be when the participant exercises the right, the share acquired upon vesting cannot be forfeited, nor are there any restrictions on the disposal of the share. Therefore the Units will have a deferred taxing point arise at the vesting date [subsection 83A-120(7)], or in the event that the shares are disposed of within 30 days of the vesting date the disposal date will be the deferred taxing point and a reporting obligation will arise at the time of the deferred taxing point.

Where a Participant ceases employment prior to the vesting date for some or all of their Units, there are two possible outcomes:

(i) The Units may vest in accordance with the ‘Unit Agreement’.

(ii) The Units may be forfeited in accordance with the ‘Unit Agreement’.

In the event that the Units vest, a deferred taxing point will arise at the vesting date [subsection 83A-120(7)of the ITAA 1997], or in the event that the shares are disposed of within 30 days of the vesting date the disposal date will be the deferred taxing point and a reporting obligation will arise at the time of the deferred taxing point. This treatment is consistent with the treatment of any Units that vest otherwise.

In the event that the Units are forfeited section 83A-310 of the ITAA 1997 will apply and Division 83A (apart from Subdivision 83A-E) will be taken to have never applied to the ESS interest. In this circumstance a reporting obligation may arise under section 392-10 of the TAA where an earlier statement had been provided because (prior to and apart from the operation of section 83A-310) a reporting obligation had arisen under paragraph 392-5(1)(a) of the TAA. Where this is the case there has been a material change in the information given to the individual or to the Commissioner (or both) and the change must be reported in accordance with section 392-10.

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