Edited version of private advice

Authorisation Number: 1051775005901

Date of advice: 16 November 2020

Ruling

Subject: Employee share schemes

Question

Have the deferred taxing points occurred in relation to your employee share scheme interests?

Answer

No.

This ruling applies for the following period

1 July 2XXX to 30 June 2XXX

Relevant facts and circumstances

Company A (the Company) is an Australian resident public company and its shares are listed on the Australian Stock Exchange (ASX).

Company A established an employee share scheme plan for its senior employees in 2XXX which enabled the Company's board of directors (the Board), at its discretion, to grant selected employees one or more of the following (the Awards):

•         Performance Rights

•         Options and/or

•         Cash rewards.

You are an Australian resident and commenced employment with the Company in 2XXX and are currently employed in the role of Chief Executive Officer with the Company.

You participated in the followed deferral employee share schemes (ESSs) offered by the Company:

•         Plan A under which:

-        Performance Rights are granted for no charge which entitles the employee to one fully paid ordinary share subject to performance conditions

-        Once vested, the employee can exercise the vested Performance Right during the exercise period

-        Resulting shares received after the Performance Rights have been exercised will be subject to restrictions on dealing which includes 'black-out' periods; and

-        No income tax is payable on the acquisition of the Performance Rights until a taxing point occurs; and

•         Plan B under which employees were awarded cash and Performance Rights, with the Performance Rights being subject to Executive Plan Rules.

The Company's Trading Policy included the following information:

•         Employees in possession of inside information about the Company's securities must not deal outside of the prohibited period and/or a closed period

•         Specific employees holding senior positions in the Company may trade their Company securities if the above prohibitions do not apply to them at the time the securities are traded, they have received the specified approval for the trading activity and provided confirmation that no prohibition applied to them prior to the trading activity being undertaken.

You were granted various numbers of ESS interests under either and/or both ESS plans in each income year during the period covered by this ruling.

You are a 'specific employee' as referred to in the Company's Trading Policy due to the position you hold with the Company during the period covered by this ruling:

•         There has not been any period during your employment with the Company when you could trade your ESS interests

•         You did not trade any of your ESS interests; and

•         You held inside information from the time you commenced your employment with the Company until the end of the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-120

Reasons for decision

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

In summary, the ESS provisions recognise the dual nature of grants of shares or rights to acquire shares (collectively ESS interests) as both a component of an employee's remuneration package and also as an ongoing investment. To this end, the ESS provisions provide a mechanism for recognising an appropriate value for remuneration purposes and an adjustment to the purchase price for investment purposes to reflect the amount treated as remuneration.

The ESS provisions achieve this outcome by determining:

•         When a taxpayer needs to include any discount received in relation to ESS interests in their assessable income, and

•         The amount of the discount.

ESS - Deferral schemes

Subdivision 83A-C of the ITAA 1997 provides that when certain conditions are satisfied, the discount in relation to an ESS interest is not included in the employee's assessable income in the income year they acquire the ESS, but will be included when the deferred taxing point (DTP) occurs under section 83A-120 of the ITAA 1997.

The DTP for an ESS interest that is a beneficial interest in a right to acquire a share that was granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120(4) to (7) of the ITAA 1997, summarised as follows:

•         When the Employee ceases the relevant employment (subsection 83A-120(5) of the ITAA 1997)

•         The end of the 15-year period starting when the Employee acquired the ESS interest (subsection 83A-120(6) of the ITAA 1997)

•         When the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-120(4) of the ITAA 1997)

•         When the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share (subsection 83A-120(7) of the ITAA 1997).

Genuine selling restrictions

The explanatory memorandum for the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 states the following in relation to genuine selling restrictions for shares and rights to acquire shares:

1.192 Genuine restrictions preventing disposal could include a condition of the scheme that contractually prevents disposal of shares. If disposing of an ESS interest would be a criminal offence, for example under a law regulating insider trading, then the employee would also be considered genuinely restricted from disposing of the share.

1.193 A company's internal share trading policy is only considered to be a restriction preventing disposal for the purposes of deferring the taxing point if the penalty for breaking the policy constitutes an effective sanction. This means that if there is no legal prohibition on the disposal of the ESS interest, there must be serious and enforced consequences for breaching the policy.

1.194 A restriction that otherwise meets the conditions for a genuine restriction, but is able to be lifted in cases of severe financial hardship, is nonetheless considered to be a genuine restriction.

1.195 Restrictions preventing disposal are considered to be lifted once an opportunity arises in which a taxpayer can realise the share.

1.196 In the case of a trading window, or restrictions that may lift and then re-engage, if the employee does not avail themself of the opportunity to dispose of the share and the window subsequently closes, there is no further delay in the taxing point. The taxing point would still be at the commencement of the first trading window.

1.197 The restriction and conditions covered by the deferred taxing points are only those that existed when the employee acquired the ESS interest. Conditions and restrictions that have been added subsequent to acquisition are ignored for the purposes for determining the deferred taxing point.

...

1.200 The taxing point is the point at which the taxpayer can take some action to realise the benefit. It does not matter whether or not they chose to do so.

Application to your situation

In your situation you were granted ESS interests under deferral ESSs. When determining when the DTPs for your ESS interests may have occurred - the first three times as listed above have not occurred at this point as you have not ceased your employment with the Company, the ESS interests granted to you (the Rights) are not transferrable and the end of 15-year period starting when you acquired the ESS interests has not occurred.

Therefore, when considering whether the other potential DTP has occurred as outlined above, we need to consider whether the ESS continued to genuinely restrict the disposal of the shares acquired by exercising the ESS interests, or if the restriction had ceased to have effect in relation to your situation as considered below.

You were granted ESS interests under the deferral ESSs offered by your employer. In accordance with the Company's Policies and Procedures Share Trading Policy you are a 'specific employee' who is strictly prohibited from dealing in the Company's shares during the black-out periods and during periods that inside information is held.

You held inside information from the time you commenced your employment, continuing to hold inside information until the end of the period covered by this ruling. Consequently, you could not seek and obtain permission to trade the Company's shares during the ruling period.

Based on the information provided you have been subject to your employer's insider trading policy and have not been able to trade due to you having insider information since you commenced your employment which constitutes genuine disposal restriction under section 83A-120 of the ITAA 1997.

Therefore, the DTPs have not occurred in relation to your ESS interests covered by this ruling that were granted by the Company during the period covered by this ruling.

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