Edited version of private advice

Authorisation Number: 1051805765723

Date of advice: 16 February 2021

Ruling

Subject: Minimum holding period for Employee Share Scheme interests

Question

Will the Commissioner allow the minimum holding periodfor Employee Share Scheme(ESS) interests to be reduced in accordance with sub-paragraph 83A-45(5)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 December 2018

Year ended 31 December 2019

Year ended 31 December 2020

Year ended 31 December 2021

The scheme commenced in:

December 2018

Relevant facts and circumstances

The Company is an Australian resident private company.

The Company's ultimate holding company (the Parent Company), is a non-resident overseas based company.

The Parent Company issued options over shares (the Options) in the Parent Company to employees of the Company (Participants) in which qualified for the start-up concessions under Subdivision 83A-B of the ITAA 1997.

The grants were made under the Employee Share Scheme Plan (the Plan).

The grants of options are governed by the Plan.

Subsequent to issuing the Options, the Company sought confirmation from independent Australian taxation advisers whether the options granted under the Plan would be eligible to access the start-up concessions. Under the amended Plan, the three-year minimum holding period requirement was satisfied by a general prohibition on the transfer of the Options and underlying shares (on exercise of Options), could only occur with express permission from the Board of the Parent Company.

The Parent Company and the Company always had the intention to operate, such that all Options and the underlying shares would not be permitted to be disposed of during the minimum three-year holding period in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997.

Since the first tranche, additional Options were issued to new employees on the commencement of their employment and there have also been periodic spot grants to employees for retention and bonuses etc.

No interests were allocated to employees from the date negotiations regarding the sale of shares (as described below) commenced.

The Transaction

The Parent Company started negotiations with the Purchaser in respect of the sale of all shares in the Company's group of entities (the Transaction).

Under the Transaction, it was proposed that the Purchaser will acquire 100% of the equity interests (on a fully diluted and as converted basis) of the Parent Company.

The disposal of the Options in connection with the completion of the Transaction will fall within three years of the grant of all Options issued to Participants in Australia under the Plan.

Assumptions

The Options qualify for the start-up concession under section 83A-33 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-33

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

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

Income Tax Assessment Act 1997 paragraph 83A-45(5)(a)

Income Tax Assessment Act 1997 sub-paragraph 83A-45(5)(a)(ii)

Income Tax Assessment Act 1997 section 83A-130

Reasons for decision

Summary

For the purposes of section 83A-45(4) of the ITAA 1997, the Commissioner will exercise his discretion under paragraph 83A-45(5)(a) to allow the minimum holding period for all Options, if any, that qualify for concessional treatment under section 83A-33 to be reduced. The Commissioner will allow the minimum holding period to be the period starting when the Options were acquired and ending at the date on which the Options were exercised and sold in connection with a 100% acquisition of the Shares in the Parent Company by the Purchaser.

Detailed reasoning

In order to qualify for the ESS start-up concessions under section 83A-33 of the ITAA 1997, the options must meet all of the conditions set down in subsection 83A-33(1).

One of the conditions is the minimum holding period requirement which is detailed in subsections 83A-45(4) and 83A-45(5) of the ITAA 1997.

Minimum holding period

Subsection 83A-45(4) of the ITAA 1997 states that:

The minimum holding period condition 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:

a)    the scheme interest; or

b)    a beneficial interest in a share acquired as a result of the scheme interest;

during the scheme interests minimum holding period.

Subsection 83A-45(5) of the ITAA 1997 states 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:

(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 under the takeover as stated by the Company then the only remaining consideration is whether the operators of the scheme intended for subsection 83A-45(4) of the ITAA 1997 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 a participant 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 participants from doing so.

In this case, the Parent Company and the Company have operated, and have always intended to operate, such that all Options and underlying shares would not be permitted to be disposed of during the minimum 3-year holding period in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997.

The rules of the Plan specifically prevent disposals prior to the end of the minimum holding period and no such disposal has been allowed.

At the time the Options were issued under the Plan, management of the Parent Company was not involved in or actively courting the Transaction or any other takeover bids.

Under the Transaction, it is intended that all the membership interests in the Parent Company are acquired by the Purchaser under the takeover.

As the rules of the Plan 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 participants from disposing of their interests before the end of the minimum holding period.

Objectively the Commissioner would not accept that that the scheme was operated to prevent the participants from disposing their interests before the end of the minimum holding period where interests were allocated after the time that it became clear that a takeover was imminent.

As the evidence indicates that this was not the case, the Commissioner will exercise his discretion to allow the reduced minimum holding period to apply.

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