1051535788307 | Legal database

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Edited version of private advice

Authorisation Number: 1051535788307

Date of advice: 26 June 2019

Ruling

Subject: The 'minimum holding period' for an employee share scheme (ESS) interest

Question

In respect of the 'minimum holding period' for an ESS interest in the Company - is the Commissioner satisfied that the conditions in subparagraphs 83A-45(5)(a)(i) and 83A-45(5)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) are met such that he will allow an earlier time than the ordinary three year minimum holding period?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2017

Relevant facts and circumstances

Employee stock ownership plan

In 2017, the Company introduced an employee stock ownership plan (ESOP) under which the Company's employees were offered a grant of Company Share Options.

The ESOP presentation to the Company employees did not anticipate a sale of the business before three to five years after the ESOP was established, and it was also possible that a sale would never eventuate.

The ESOP is governed by the Employee Option Plan Rules (dated 2017) (EOP Rules). A key clause in the EOP Rules stipulates that a legal or a beneficial interest in an Option or an Option Share may not be disposed of until the earlier of three years after the issue of the Option or such earlier time as the Commissioner of Taxation allows in accordance with subsection 83A-45(5).

There was one issue of Options under the ESOP in 2017.

In 2018, the Board of the Company explored options for the future of the company due to a downturn in business, one of which was to sell the business.

In 2019, the Board finalised the sale process and signed a Letter of Intent which contemplates a party acquiring 100% of the shares of the Company.

The purchaser is not related to, or an associate of, the Company or any of its shareholders/controllers.

Relevant legislative provisions

Income Tax Assessment Act 1997, subsection 83A-10(1)

Income Tax Assessment Act 1997, subsection 83A-10(2)

Income Tax Assessment Act 1997, Subdivision 83A-B

Income Tax Assessment Act 1997, section 83A-33

Income Tax Assessment Act 1997, subsection 83A-33(1)

Income Tax Assessment Act 1997, paragraph 83A-33(1)(b)

Income Tax Assessment Act 1997, subsection 83A-45(4)

Income Tax Assessment Act 1997, subsection 83A-45(5)

Income Tax Assessment Act 1997, subparagraph 83A-45(5)(a)(i)

Income Tax Assessment Act 1997, subparagraphs 83A-45(5)(a)(ii)

Reasons for decision

In 2017, the Company made a grant of Options to employees that were intended to qualify for the start-up concessions under Subdivision 83A-B.

The Company has stated that at all times they have operated the Employee Stock Ownership Plan (ESOP) such that all Options and Option Shares would not be permitted to be disposed of during the minimum holding period in accordance with the requirements in subsections 83A-45(4) and 83A-45(5).

In 2019 the Company signed a Letter of Intent with a purchaser, who will acquire 100% of the Shares of the Company.

As a result, the Options will have been held for less than three years after their acquisition from the ESOP.

In order to qualify for the ESS start-up concessions under section 83A-33, the Options must meet all of the conditions in subsection 83A-33(1).

One of the conditions is the minimum holding period condition detailed in subsections 83A-45(4) and 83A-45(5).

The minimum holding period condition, in subsection 83A-45(4), is satisfied if the scheme is operated so that every acquirer of an ESS interest (the scheme interest) under the scheme is not permitted to dispose of the scheme interest; or a beneficial interest in a share acquired as a result of the scheme interest, during the scheme interest's minimum holding period.

Subsection 83A-45(5) provides that:

An ESS interest's minimum holding period is the period starting when the interest is acquired under the employee share scheme and ending at the earlier of:

(a) 3 years later, or such earlier time as the Commissioner allows if the Commissioner is satisfied that:

(i) the operators of the scheme intended for subsection (4) to apply to the interest during the 3 years after the acquisition of the interest; and

(ii) at the earlier time that the Commissioner allows, all membership interests in the relevant company were disposed of under a particular scheme; and

(b) when the acquirer of the interest ceases being employed by the relevant employer.

Provided that all the membership interests in the Company are acquired, then the only remaining consideration is whether the operators of the scheme intended for subsection (4) to apply to the interest during the three years after the acquisition of the interest.

The operators of the scheme would fail the test if they had either allowed an Optionholder to dispose of their interest prior to the end of its minimum holding period or there was objective evidence that the scheme was not operated to prevent the Optionholders from doing so.

As the rules of the ESOP specifically prevent disposals under these circumstances and there is no evidence that any such disposal has been allowed the only remaining consideration is whether there was objective evidence that the scheme was not operated to prevent the Optionholders from disposing of their interests before the end of the minimum holding period.

The ESOP presentation to the Company employees did not anticipate a sale of the business before three to five years after the ESOP was established. It was also possible that a sale would never eventuate.

Therefore, the Commissioner is satisfied that the scheme was intended to operate to prevent the Optionholders from disposing of their interests before the end of the minimum holding period. The Commissioner will exercise his discretion to allow the reduced minimum holding period to apply.

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