Edited version of your written advice

Authorisation Number: 1051493642108

Date of advice: 25 March 2019

Ruling

Subject: Employee share scheme – Options – Deferred taxing point - Cancellation

Question 1: Did the deferred taxing point occur for employee share scheme (ESS) purposes when the options were cancelled?

Answer: Yes.

Question 2: Did capital gains tax (CGT) event C2 occur when the options were cancelled?

Answer: Yes.

Question 3: Is any capital gain or capital loss you made from the cancellation of the options disregarded?

Answer: Yes.

This ruling applies for the following period:

2017-18 income year

The scheme commences on:

28 September 2015

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.

You are an Australian resident for income tax purposes and are employed by Company A.

You participated in an Equity Incentive Plan operated by Company A and were granted options that entitled you to acquire ordinary Company A shares at specified exercise prices. The Equity Incentive Plan has comprehensive Plan Rules about your rights and the consequences if particular events occur.

The options (as rights to acquire shares) are ESS interests and the Equity Incentive Plan meets the conditions to be a deferral scheme for ESS purposes.

Some three years ago, you were granted (at no cost) options to acquire Company A shares at a specified exercise price each with an expiry date of five years after the date of issue. The options were to vest in three equal tranches on about the first, second and third anniversary of the offer date.

Some two years ago, you were granted (at no cost) further options to acquire Company A shares at a specified exercise price with an expiry date of five years after the date of issue. The options were to vest in three equal tranches on the first, second and third anniversary of the issue date.

About a year ago, you were granted (at no cost) more options to acquire Company A shares at a specified exercise price with an expiry date of five years after the date of issue. The options were to vest in three equal tranches on the first, second and third anniversary of the issue date.

During the 2017-18 income year, another listed company acquired Company A.

You entered into an Option Cancellation Deed at this time and agreed to have your options cancelled in return for cash consideration calculated for each option as the share sale price under the takeover less the exercise price of that option.

Company A have provided you with an ESS Statement for the 2017-18 income year showing the whole amount received as assessable income from a deferral scheme.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 130-80

Reasons for decision

Question 1

Summary

The deferred taxing point occurred for ESS purposes when the options were cancelled.

Detailed reasoning

The grant of options to you at a discount to their market value forms part of your remuneration package. The ESS provisions work out:

● the amount of the discount you received which is included in your assessable income, and

● when the discount is assessable.

For deferral schemes, you have to work out the amount of your discount as at the ‘deferred taxing point’.

The deferred taxing point for your options is the earliest occurrence of four potential taxing points. Three of these potential deferred taxing points have not occurred:

● your employment with Company A has not ended

● 15 years have not elapsed from the grant date of any of the options, and

● You have not exercised the options.

The other potential taxing point is about the ending of selling restrictions on the options. The provision (subsection 83A-120(4) of the Income Tax Assessment Act 1997) reads:

The first possible taxing point is the earliest time when:

(a) you have not exercised the right; and

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

(c) if, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the ESS interest - the scheme no longer so restricts you.

You will not continue to be at a real risk of forfeiture of the options if you have disposed or can dispose them. Equally, you will not be subject to a genuine disposal restriction if you have disposed or can dispose them.

Ultimately, your issue is about whether the cancellation of the options is considered to be their disposal for ESS purposes. In this regard, ‘disposal’ is not a defined term so it takes its ordinary meaning. (The capital gains definition of ‘disposal’ about transferring an asset to another entity only applies for capital gains purposes.)

The definition of the term ‘disposed of’ has been judicially considered:

In F C of T v Wade (1951) 84 CLR 105, Dixon and Fullagar JJ, when considering the term 'disposed of' in the former section 36 of the Income Tax Assessment Act 1936, said (at 110):

'The words "disposed of" are not words possessing a technical legal meaning, although they are frequently used in legal instruments. Speaking generally, they cover all forms of alienation.'

In Henty House Pty Ltd (In Voluntary Liquidation) v F C of T (1953) 88 CLR 141, Williams ACJ, Webb, Kitto and Taylor JJ said (at 152):

'... the words "is disposed of" are wide enough to cover all forms of alienation,... and they should be understood as meaning no less than "becomes alienated from the taxpayer", whether it is by him or by another that the act of alienation is done.'

The cancellation of your options is a form of alienation that would meet the definition of ‘disposal’ as indicated above.

You referenced CR 2014/64 in your Application. Paragraph 67 identifies the cancellation of options in that situation as their disposal.

For these reasons, the Commissioner considers the cancellation of your options to be their disposal for ESS purposes which was their deferred taxing point.

Question 2

Summary

CGT event C2 occurred when the options were cancelled.

Detailed reasoning

CGT event C2 occurs if your ownership of an intangible CGT asset ends in certain specified ways. The conditions for CGT event C2 are satisfied in relation to the cancellation of the options because:

● The options were CGT assets

● You owned them just before they were cancelled, and

● The cancellation of an intangible asset is a specified way of causing CGT event C2 to occur.

Question 3

Summary

Any capital gain or capital loss you made from the cancellation of the options is disregarded.

Detailed reasoning

The ordinary CGT provisions are modified for shares and rights to acquire shares that are granted under an ESS to avoid double taxation.

These ESS modifications to the ordinary CGT provisions provide an exemption for any capital gain or capital loss to the extent that it results from a CGT event if:

● the CGT event happens in relation to an ESS interest you acquired under an ESS, and

● the CGT event is not CGT event E4, G1 or K8, and

● for a deferral scheme – the CGT event happens on or before the ESS deferred taxing point for the ESS interest.

In your case, both the deferred taxing point and CGT event C2 have occurred due to the cancellation of your options. The CGT consequences are disregarded and only the ESS provisions apply to the cancellation.

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