Edited version of private advice

Authorisation Number: 1051806340106

Date of advice: 18 February 2021

Ruling

Subject: Employee share scheme

Question 1

Where an employee participant ceases employment with the taxpayer and retains unexercised options (New Options) granted under the taxpayer's Employee Option Plan (EOP), is the taxpayer required under section 392-10 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to provide a statement to the Commissioner and to the Participant within 30 days of the New Options being exercised, and the taxpayer deciding to satisfy that exercise by issuing ordinary shares (Shares)?

Answer

Yes.

Question 2

Is the taxpayer required under paragraph 392-5(1)(b) of Schedule 1 to the TAA to provide a statement to the Commissioner and to the Participant for the financial year in which amendments are made to the terms of options (Old Options)?

Answer

No.

Question 3

In respect of the Old Options, is the taxpayer required, under paragraph 392-5(1)(b) of Schedule 1 to the TAA, to provide a statement to the Commissioner and to the participant for the financial year in which the Old Options lapse as a result of:

•         the Participant exercising the New Options; or

•         the Participant ceasing employment with the taxpayer Group; or

•         an Exit Event happening (as defined in the EOP)?

Answer

No.

Question 4

In respect of the New Options that lapse as a result of the Participant exercising the Old Options, is the taxpayer required under paragraph 392-5(1)(b) of Schedule 1 to the TAA to provide a statement to the Commissioner and to the Participant for the financial year in which the New Options lapse?

Answer

No.

This ruling applies for the following periods:

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

1 July 20xx to 30 June 20xx

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

Background

The taxpayer is an Australian private company for the purpose of the Corporations Act 2001 (Cth).

The Employee Option Plan- First offer

The taxpayer introduced an Employee Option Plan (EOP) as part of its employee incentive and retention plans. Under the EOP, the taxpayer granted options to certain eligible employees (Participants) in respect of their employment with the company.

For options granted under the EOP (the Old Options), when a Participant exercises these options, the taxpayer is required to issue the number of shares which correspond with the number of exercised options. All the Old Options were granted.

The taxpayer regularly reviews its EOP in light of market trends to ensure that it remains an attractive incentive/remuneration tool for current and prospective employees.

In XXXX, the taxpayer amended the EOP so it could have the discretion to satisfy exercised options with a cash payment in lieu of shares. This meant that if the taxpayer exercised its discretion to make a cash payment, the Participant is not entitled to receive shares.

The Old Options continue to be administered by the taxpayer under the EOP rules that existed at the time of issue of the Old Options and prior to the amendments. This means that if the Old Options are exercised, the taxpayer must satisfy that exercise by issuing the relevant number of shares.

The Employee Option Plan- Second Offer

In XXXX, the taxpayer considered making a new offer of options (the Second Offer) to Participants who held the Old Options.

The terms of the Second Offer, if that offer is made, will be governed by the amended EOP and will be administered by the Board.

However, the taxpayer wishes to ensure that Participants who hold the Old Options and who may be offered options under the Second Offer are not placed in a more favourable position to other Participants who did not receive an offer of Old Options. Accordingly, Participants will only ever be entitled to exercise and realise the benefit of one group of unexercised options:

•         unexercised options from the First Offer, or

•         unexercised options from the Second Offer.

Once one of the two option types is chosen, the other option type immediately lapses.

According to the EOP, the taxpayer has the complete power and discretion in respect of the following:

•         selecting the persons to participate in the Plan (which are referred to as Eligible Persons);

•         determining the terms and conditions of any offer including:

-        the number of Options under an Offer;

-        the purchase price for those Options;

-        the exercise price for the Options;

-        any trustee or nominee holding arrangements required to be entered into in connection with those Options;

-        the vesting, disposal and forfeiture restrictions applying to those Options; and

-        the manner in which the Offer may be accepted.

•         amending an offer related to an Option;

•         determining appropriate procedures, regulations and guidelines for the administration of the New Plan;

•         taking advice in relation to the exercise of any of its powers.

The EOP states in relation to the vesting of Options:

What vesting conditions may be set

(a)  An Offer may specify any:

1.    vesting conditions; or

2.    other vesting events,

which must be satisfied before an Option vests.

(b)  The Board may, in its discretion, determine or vary any:

1.    vesting conditions; or

2.    other vesting events,

in respect of any Option.

(c)   If vesting conditions or other vesting events are not specified in an Offer the following vesting conditions apply to any Options offered under the Employee Option Plan:

1.    Options:

A.    only vest while the eligible person remains employed with a Company Group Member or acts as a director of a Company Group Member (as applicable); and

B.    cease to vest for the duration of any unpaid leave of absence (Unpaid Leave Period), such that any vesting dates occurring after the Unpaid Leave period are delayed by a period equivalent to the Unpaid Leave Period;

2.    Options vest:

A.    In respect of 25% of the Options the subject of an Offer, on the date which is 12 months after the issue date of the Option (Year 1); and

B.    In respect of the remaining 75% of the Options the subject of the Offer, on a yearly basis over 3 year period after the end of Year 1.

Options only vest if vesting conditions/events satisfied

(d)  An Option will only vest on the occurrence or satisfaction of the condition or other vesting events specified in respect of that Option.

How to exercise an Option

(e)  An Option holder may exercise an Outstanding Option during the Exercise Period or, with the Board's explicit consent, an unvested Option prior to the Expiry Date by:

1.    Giving the Company a signed Notice; and

2.    Paying the Exercise Price multiplied by the number of Options being exercised.

The EOP provides that the Board will have absolute discretion in relation to a Participant's Options when a Participant ceases employment with the taxpayer.

The Board will have the discretion to:

•         cancel these options,

•         require these options be sold; or

•         allow the Participant to retain some or all of these Options.

Participation in the Second Offer will be open to an Eligible Person, defined in the EOP as any employee or salaried director of one or more members of the taxpayer selected by the Board to participate in the EOP.

Participants will not be required to provide any consideration for the acquisition of the Options.

Offer Document for the Second Offer

The offer document governing the terms of the Second Offer contains the following:

Vesting dates and vesting conditions

(a)  Options vest:

                    (i)        In respect of 25% of the Options the subject of an Offer, on the date which is 12 months after the issue date of the Option (Year1); and

                  (ii)        In respect of the remaining 75% of the Options the subject of the Offer, on a yearly basis over 3 year period after the end of Year 1.

(b)  Options:

                    (i)        only vest while the eligible person remains employed with a Company Group Member or acts as a director of a Company Group Member (as applicable); and

                  (ii)        cease to vest for the duration of any unpaid leave of absence (Unpaid Leave Period), such that any vesting dates occurring after the Unpaid Leave period are delayed by a period equivalent to the Unpaid Leave Period;

Entitlement

Participants are entitled to the number of Ordinary Shares in the Company which corresponds with the number of New Options disclosed in the offer letter, unless on exercise the Company decides to settle the Options with a cash payment pursuant to the Employee Option Plan. In which case a payment equal to the difference between the fair market value per ordinary share on the exercise date and the exercise price multiplied by the number of options.

Automatic lapsing conditions

Your unexercised New Options will automatically lapse if and when you submit an Exercise Notice in respect of options granted to you pursuant to the offer letter (the Old Options).

Exercise Conditions

You may give the company an Exercise Notice if the New Options have vested in accordance with the vesting conditions and you have not submitted an Exercise Notice in respect of unexercised Old Options. If you submit an Exercise Notice in respect of unexercised Old Options, your New Options will automatically lapse.

Old Options

If the Old Options have not been exercised and you submit an Exercise Notice in respect of the New Options, the Old Options will lapse and you will not be able to exercise them.

The Old Options will lapse if you have not exercised them and you cease to be employed by a Company Group Member or an Exit Event occurs as defined in the plan rules.

Other terms

The rights and obligations which apply to New Options, including in relation to vesting, disposal and forfeiture are specified in the Employee Option Plan. The Employee Option Plan governs the Options that are issued to you.

Accordingly, if a Participant accepts an offer of New Options under the Second Offer, and is issued with those New Options on the terms described in the relevant offer document, the Participants are agreeing to the terms of which they hold the Old Options being varied according to the description under the heading Old Options in the offer document for that Second Offer.

Old Options which have not been exercised will automatically lapse when the Participant gives the taxpayer a signed exercise notice in respect of vested New Options.

Vested and unvested Old Options that have not been exercised will automatically lapse if and when the Participant ceases employment with the taxpayer or on the occurrence of an Exit Event.

Immediately after acquiring the ESS interest, the employee does not hold a beneficial interest in more than 10% of the shares in the company or is 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.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-10

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

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

Income Tax Assessment Act 1997 section 83A-105

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 section 83A-310

Income Tax Assessment Act 1997 section 83A-330

Income Tax Assessment Act 1997 section 83A-340

Taxation Administration Act 1953 paragraph 392-5(1)(b)

Taxation Administration Act 1953 section 392-10

Reasons for decision

Question 1

Summary

When a Participant ceases employment and later exercises the New Options under the Second Offer and the taxpayer decides to satisfy the New Options by issuing Shares, the Participant will be deemed to have acquired an 'ESS interest' to which Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies. An 'ESS deferred taxing point' would occur at the time the employee ceased employment with the taxpayer.

Accordingly, the taxpayer will be required to give the Commissioner and the Participant the information required under section 392-5 of Schedule 1 to the TAA in relation to the New Options. The information will need to be given no later than 30 days after the decision is made to issue shares to satisfy the exercise of the New Options under the second offer.

Detailed reasoning

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997to mean a beneficial interest in either:

(a)  a share in the company; or

(b)  a right to acquire a beneficial interest in a share in the company.

Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of:

(a)  the company; or

(b)  subsidiaries of the company;

in relation to the employees' employment.

The granting of an indeterminate right may give rise to the application of section 83A-340 of the ITAA 1997 if a beneficial interest in a right is acquired and that right later becomes a right to acquire a beneficial interest in a share, Division 83A applies as if the right had always been a right to acquire the beneficial interest in the share (that is, it is treated as having always been an ESS interest).

The conditions that need to be satisfied, in order for subsection 83A-340(1) of the ITAA 1997 to apply are (See paragraph 1 of Taxation Determination TD 2016/17 Income Tax: in what circumstances does a contractual right, which is subject to the satisfaction of a condition, become a right to acquire a beneficial interest in a share for the purposes of subsection 83A-340(1) of the Income tax assessment Act 1997?):

(a) you acquire a right under a contract;

(b) at the time you acquire it, the right is not a right to acquire a beneficial

interest in a share;

(c) at a later time, and because a condition in the contract is satisfied, the right 'becomes' a different right; and

(d) at this later time, the right is a right to acquire a beneficial interest in a share (a right to acquire a share).

Subsection 83A-340(1) of the ITAA 1997 provides two examples.

Example 1: You acquire a right to acquire, at a future time:

(a) shares with a specified total value, rather than a specified number of shares; or

(b) an indeterminate number of shares.

Example 2: You acquire a right under which the provider must provide you with either ESS interests or cash, whichever the provider chooses.

Once the conditions outlined above are satisfied, pursuant to subsection 83A-340(2), the ESS provisions will apply as if the right had always been a right to acquire the beneficial interest in the share.

This is explained in the Explanatory Memorandum for the Tax Laws Amendment (2009 Budget Measures No.2) Bill 2009 (EM) at paragraphs 1.367 as follows:

At the time of acquisition it may be unclear whether a right to an employment benefit will result in the receipt of an ESS interest, or it may be unascertainable how many ESS interests will be received. In such circumstances, that right will be considered to have been an ESS interest from the time that the original right to an employment benefit was acquired, if and when it becomes clear that the right to the employment benefit will result in the receipt of a definite number of ESS interests.

Options granted under the Second Offer represent a right to acquire shares or to receive a cash payment when the New Options are exercised. Therefore, the New Options will be 'indeterminate rights' under section 83A-340 of the ITAA 1997 and they will be treated as if they had always been ESS interests when the company decides to satisfy the exercise of the Options by issuing shares.

If the taxpayer provides the employee cash, rather than issuing them with shares, the ESS provisions in Division 83A of the ITAA 1997 do not apply.

Subdivision 83A-C

Section 83A-105 of the ITAA 1997 sets out the conditions that must be satisfied to be able to defer the inclusion in assessable income of any discount received on the acquisition of an ESS interest until the financial year in which the ESS deferred taxing point occurs. These conditions are as follows:

(i) the ESS interest is acquired at a discount under an employee share scheme (paragraph 83A-105(1)(a) and section 83A-20 of the ITAA 1997);

(ii) the employee is, at that time, employed by the company or a subsidiary of the company (paragraph 83A-105(1)(b) and subsection 83A-35(3) of the ITAA 1997);

(iii) all the ESS interests under the employee share scheme relate to ordinary shares (paragraph 83A-105(1)(b) and subsection 83A-35(4) of the ITAA 1997);

(iv) the predominant business of the company in which the ESS interest is acquired is not the acquisition, sale or holding of shares, securities or other investments or if it is, the employee is not employed by the company and employed by another company that is a subsidiary or holding company of that company, or a subsidiary of the holding company (paragraph 83A-105(1)(b) and subsection 83A-35(5) of the ITAA 1997);

(v) immediately after acquiring the ESS interest, the employee does not hold a beneficial interest in more than 10% of the shares in the company or is 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 (paragraph 83A-105(1)(b) and subsection 83A-35(9) of the ITAA 1997);

(vi) if the ESS interest is a beneficial interest in a right to acquire a beneficial interest in a share, at the time the employee acquired the ESS interest there is a real risk of forfeiting or losing the right (other than by disposing of the right, exercising the right or letting the right lapse) or there is a real risk of forfeiting the underlying share (paragraphs 83A-105(1)(d) and 83A-105(3)(b) of the ITAA 1997).

If the New Options became ESS interests by virtue of the taxpayer issuing shares on the exercise of those options, the conditions in section 83A-105 of the ITAA 1997 would be satisfied as follows:

(i) The New Options are acquired under the Second Offer of the EOP which constitutes an ESS interest for the purposes of subsection 83A-10(2) of the ITAA 1997 (in that it is a scheme under which the New Options are provided only to employees of the taxpayer in relation to their employment);

(ii) the employees are not required to provide any consideration to acquire the New Options under the Second Offer. The New Options are therefore acquired at a discount for the purposes of section 83A-20 of the ITAA 1997;

(iii) the New Options acquired under the Second Offer are treated as rights of the Participant to acquire fully paid ordinary shares in the taxpayer;

(iv) the predominant business of the taxpayer is not the acquisition, sale or holding of shares, securities or other investments;

(v) no employee will hold a beneficial interest in more than 10% of shares immediately after acquiring the New Options, or be in a position to cast or control the casting of more than 10% of the maximum number of votes that may be cast at a general meeting of the taxpayer;

(vi) there is a real risk of forfeiting the New Options, for the following reasons.

The EM explains the real risk of forfeiture test at paragraph 1.156 as follows:

The 'real risk of forfeiture test' does not require employers to provide schemes in which their employee share scheme benefits are at a significant or substantial risk of being lost. However, real is regarded as something more than a mere possibility. Something is not a real risk if a reasonable person would disregard the risk as highly unlikely to occur or as nothing more than a rare eventuality or possibility.

It is further explained at paragraph 1.158 of the EM that the 'real risk of forfeiture test' is intended to provide for deferral of tax when there is a real alignment of interests between the employee and employer, through the employee's benefits being at risk.

Paragraph 1.159 of the EM states that real risk can include situations in which the securities will be forfeited if a minimum term of employment is not completed.

Example 1.9 is provided in the EM. It states:

Ulrick enters an employee share scheme arrangement with his employer, Retrorocket Ltd. He will receive 1,000 Retrorocket shares in 12 months, if he is still employed by Retrorocket at that time.

Real risk of forfeiture: Yes, Ulrick's rights to receive shares are at risk because he will forfeit them if he leaves the company. If he meets the other conditions for deferral, he will defer tax until the 'ESS deferred taxing point.

In order for the 'real risk of forfeiture test' to be satisfied, in relation to an ESS interest acquired by an employee under an employee share scheme, a reasonable person must consider that there is an actual possibility of forfeiture. Furthermore, the risk of forfeiture must be 'real', not nominal, artificial or contrived. There must be more than a mere possibility (see ATO Interpretative Decision ATO ID 2010/61 Income Tax Employee share scheme: real risk of forfeiture - minimum term of employment and good leaver provisions )

In considering whether a condition in a scheme imposes a real risk of forfeiture, the Commissioner will have regard to whether a reasonable person would consider that there is a genuine connection between the forfeiture condition and aligning the interests of the employee and employer (see ATO ID 2010/61).

Under the Second Offer of the EOP, the taxpayer has the discretion to permit employees who cease employment to retain the New Options in special circumstances. The taxpayer confirms and the Commissioner accepts that the discretion will not be routinely exercised.

Therefore, we accept that there is a real risk that an employee will forfeit or lose their New Options.

When the ESS deferred taxing point occurs

Section 83A-120 of the ITAA 1997 contains the rules for determining when the ESS deferred taxing point occurs for rights to acquire shares.

Subsection 83A-120(2) of the ITAA 1997 states that the ESS deferred taxing point for the ESS interest is the earliest of the times mentioned in subsections (4) to (7).

However, subsection 83A-120(3) of the ITAA 1997 states:

The ESS deferred taxing point for the ESS interest is:

(a)  the time you dispose of the ESS interest (other than by exercising the right); or

(b)  if you exercise the right - the time you dispose of the beneficial interest in the share

if the that time occurs within 30 days after the time worked out under subsection (2).

Subsection 83A-120(4) of the ITAA 1997 states:

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.

Subsection 83A-120(5) of the ITAA 1997 states:

The 2nd possible taxing point is the time when the employment in respect of which you acquired the interest ends.

Subsection 83A-120(6) of the ITAA 1997 states:

The 3rd possible taxing point is the end of the 15 year period starting when you acquired the interest.

Subsection 83A-120(7) states:

The 4th possible taxing point is the earliest time when:

(a)  you exercise the right, and

(b)  (Repealed by No 105 of 2015)

(c)   There is no real risk that, under the conditions of the scheme, after exercising the right, you will forfeit or lose the beneficial interest in the share (other than by disposing of it), and

(d)  If, at the time you acquired the ESS interest, the scheme genuinely restricted you immediately disposing of the beneficial interest in the share if you exercised the right - the scheme no longer so restricts you.

If a Participant ceases employment with the taxpayer and retains their New Options under the Second Offer, and the Participant has not exercised the New Options, Division 83A of the ITAA 1997 has no application. At this time, the now ex-employee still has an indeterminate right (and does not have an ESS interest) and as such, there is no ESS deferred taxing point.

Once the ex-employee exercises their New Options under the Second Offer and the taxpayer issues shares, subsection 83A-340(2) of the ITAA 1997 will operate to treat the New Options as having always been an ESS interest with the consequence that an ESS deferred taxing point will have occurred as at the time the Participant ceased employment with the taxpayer.

Reporting obligations

Section 392-5 of Schedule 1 to the TAA states that an entity must give a statement to the Commissioner and to an individual for a financial year if the entity provides ESS interests ( to which subdivisions 83A-B or 83-A-C apply) to the individual during the financial year, or an ESS deferred taxing point for the ESS interests occurs during the financial year and Subdivision 83A-C applies.

Paragraph 392-10(1)(b) of Schedule 1 to the TAA states that the provider of an ESS interest must give the omitted information to the individual or the Commissioner if the provider becomes aware of a material omission in any information given to the individual or the Commissioner under this Division.

The EM provides an example where indeterminate rights to which section 83A-340 of the ITAA 1997 applies give rise to circumstances that would require a provider to comply with paragraph 392-10(1)(b) of Schedule 1 to the TAA; it states:

if an employer becomes aware of an omission or change in any information provided to the Commissioner under the reporting requirements, such as it becomes clear that a right provided to an employee in a previous income year was a right to ESS interest, the employer must inform the Commissioner of any changes or omission as soon as possible.

When a Participant exercises the Options under the Second Offer and the taxpayer decides to satisfy the Options by issuing shares, the Participant will be taken to have acquired an ESS interest to which Subdivision 83A-C of the ITAA 1997 applies, and an ESS deferred taxing point would occur as at the time they ceased employment with the taxpayer.

Accordingly, the taxpayer will be required to give the Commissioner and the Participant the information required under section 392-5 of Schedule 1 to the TAA in relation to the New Options under the Second Offer, and the information will need to be given no later than 30 days after the decision is made to issue shares to satisfy the exercise of these Options.

Question 2

Summary

The taxpayer is not required under paragraph 392-5(1)(b) of Schedule 1 to the TAA to provide a statement to the Commissioner and to the Participant for the financial year in which amendments are made to the terms of the Old Options in respect to the making of the amendments.

This is because no ESS deferred taxing point arises for the Old Options when the amendments are made to the terms of the Old Options.

Detailed reasoning

Paragraph 392-5(1)(b) of Schedule 1 to the TAA states that an entity must give a statement to the Commissioner and to an individual for a financial year if the entity provides ESS interests (to which subdivisions 83A-B or 83-A-C apply) to the individual during the financial year, or an ESS deferred taxing point for the ESS interests occurs during the financial year and Subdivision 83A-C applies.

The meaning of ESS interest and employee share scheme are discussed at Question 1.

Section 83A-105 of the ITAA 1997 sets out the conditions that must be satisfied to be able to defer the inclusion in assessable income of any discount received on the acquisition of an ESS interest until the financial year in which the ESS deferred taxing point occurs. These conditions are explained in Question 1.

The conditions in section 83A-105 of the ITAA 1997 are satisfied as follows:

         (i)    The Old Options are acquired under the First Offer of the EOP which constitutes an ESS interest for the purposes of subsection 83A-10(2) of the ITAA 1997 in that it is a scheme under which the Old Options are provided only to employees of the taxpayer in relation to their employment;

        (ii)    the employees are not required to provide any consideration to acquire the Old Options under the Second Offer. The Old Options are therefore acquired at a discount under an ESS for the purposes of section 83A-20 of the ITAA 1997;

      (iii)    the Old Options acquired under the First Offer of the ESS are treated as rights of the employee to acquire fully paid ordinary shares in the taxpayer;

      (iv)    the predominant business of the taxpayer is not the acquisition, sale or holding of shares, securities or other investments;

       (v)    no employee will hold a beneficial interest in more than 10% of shares immediately after acquiring the Old Options, or be in a position to cast or control the casting of more than 10% of the maximum number of votes that may be cast at a general meeting of the taxpayer;

      (vi)    there is a real risk of forfeiting the Old Options. A minimum term of employment of at least 12 months is required before 25% of the options vest. The remaining 75% are divided into three equal tranches and one tranche vests in each subsequent year.

Section 83A-120 of the ITAA 1997 contains the rules for determining when the 'ESS deferred taxing point' occurs for rights to acquire shares.

As set out in question 1, this will be the earlier of the following times:

•         The time when the employee has not exercised the right and there is no real risk that, under the conditions of the employee share scheme that they will forfeit or lose the ESS interest. If at the time they acquired the ESS interest, the scheme genuinely restricted them from immediately disposing of the ESS interest- the scheme no longer so restricts them.

•         when the employee ceases the employment in respect of which they acquired the rights within the meaning of section 83A-330 of the ITAA 1997;

•         fifteen years after the employee acquired the rights;

•         when the employee exercises the right and there is no real risk that, under the conditions of the employee share scheme, they will forfeit or lose the ESS interest. If at the time they acquired the ESS interest, the scheme genuinely restricted them from immediately disposing of the ESS interest- the scheme no longer so restricts them.

The amendments made to the terms of the Old Options under the First Offer will not result in any of the ESS deferred taxing points described in section 83A-120 of the ITAA 1997 being satisfied. Relevantly:

•         the amendments do not vary the terms of the Old Options to the extent that there is a disposal of the Old Options and a reacquisition of replacement options on the amended terms. The amended terms are not sufficiently material that they fundamentally alter the nature and value of what is held. The amendments simply amend the conditions under which the Old Options may lapse,

•         as the amendments do not result in a reacquisition of replacement options on amended terms, the 15 year period still applies from when the First Offer was made, and

•         after the amendments are made, there will continue to be a real risk that the Participant will forfeit or lose the Old Options (other than by disposing of them, exercising them or letting them lapse) because the employee must still meet the service conditions for vesting. This will continue until a deferred taxing point arises for the Old Options or the employee lets the unexercised Old Options lapse by exercising the New Options.

The amendments will not amount to either a disposal or rescission of the Old Options under the First Offer. The taxpayer and the employee do not intend for the changes to rescind the First Offer in favour of the new offer but intend for the First Offer to subsist and remain in effect except for the changes made. The Old Options under the First Offer will continue to represent a right to acquire shares. If the Old Options are exercised, the taxpayer will continue to have an obligation to issue the shares. The amendments will not change the fundamental terms of the offer made.

Therefore, an ESS deferred taxing point will not be satisfied under section 83A-120 of the ITAA 1997 as a result of the amendments made to the First Offer to introduce new lapsing conditions. Accordingly, the taxpayer is not required under paragraph 392-5(1)(b) of Schedule 1 to the TAA to provide a statement to the Commissioner and to the Participant for the financial year in which the amendments are made to the First Offer.

Please note material changes or omissions are required to be reported under section 392-10 of the TAA if you have previously reported under Division 392.

Question 3

Summary

The taxpayer is not required to provide a statement to the Commissioner and to the Participant under paragraph 392-5(1)(b) of Schedule 1 to the TAA for the financial year in which the unexercised Old Options under the first offer lapse as a result of:

•         the Participant exercising the New Options under the Second Offer,

•         the Participant ceasing employment with the taxpayer; or

•         an Exit Event happening (as defined in the EOP).

However, if any of the Old Options have vested, an ESS deferred taxing point may have already occurred and there would be a reporting obligation in relation to this. If a deferred taxing point has already occurred and an amount has been included in the individual's assessable income, then the individual may be entitled to a refund under section 83A-310 of the ITAA 1997. This is because the individual has made a choice not to exercise the Old Options before they lapse.[1]

Detailed reasoning

As discussed at Question 1, an entity must give a statement to the Commissioner and to an individual for an income year if all the following subparagraphs are met under paragraph 392-5(1)(b) of Schedule 1 to the TAA:

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

•         Subdivision 83A-C of the ITAA 1997 (about ESS) applies to the interest; and

•         the ESS deferred taxing point for the interests occurs during the year.

The meaning of ESS interest and employee share scheme are discussed at Question 1.

Section 83A-105 in Subdivision 83A-C of the ITAA 1997 sets out the conditions that must be satisfied to be able to defer the inclusion in assessable income of any discount received on the acquisition of an ESS interest until the financial year in which the ESS deferred taxing point occurs. These conditions are explained in Question 1.

Section 83A-120 of the ITAA 1997 contains the rules for determining when the ESS deferred taxing point occurs for rights to acquire shares. These rules are explained in Question 1.

Section 83A-310 of the ITAA 1997 states that Division 83A (except for Subdivision 83A-E) is taken never to have applied in relation to an ESS interest acquired by an individual under an ESS if:

(1)(a) disregarding this section, an amount is included in the individual's assessable income under this Division in relation to the interest; and

(b) either:

                        (i)    the individual forfeits the interest; or

                       (ii)    in the case of an ESS interest that it is a beneficial interest in a right - the individual forfeits or loses the interest (without having disposed of the interest or exercised the right); and

(c) the forfeiture or loss is not the result of:

                        (i)    a choice made by the individual (other than a choice to which subsection (2) applies); or

                       (ii)    a condition of the scheme that has the direct effect of protecting (wholly or partly) the individual against a fall in the market value of the interest.

(2) This subsection applies to the following choices by the individual:

(a) a choice to cease particular employment;

(b) in the case of an ESS interest that is a beneficial interest in a right:

(i) a choice not to exercise the right before it lapsed; or

(ii) a choice to allow the right to be cancelled.

A Participant's ESS interest would be lost or forfeited for the purposes of section 83A-310 of the ITAA 1997 when they no longer have the right to the ESS interest.

Subparagraph 83A-310(1)(c)(i) of the ITAA 1997 specifically states that section 83A-310 will not apply where the forfeiture or loss was the result of a choice made by the individual. However, in the case of an ESS interest that is a beneficial interest in a right, section 83A-310 will apply if the individual makes a choice not to exercise the right before it lapsed or to allow the right to be cancelled.

A reporting requirement will arise under paragraph 392-5(1)(b) of the ITAA 1997 when a deferred taxing point occurs in relation to the Old Options. Therefore, it must be determined whether the taxpayer would have a reporting obligation as a result of a deferred taxing point occurring for the following events:

•         exercising the New Options,

•         ceases employment with the SafetyCulture Group with an unexercised old option; or

•         an Exit Event happening (as defined in the Plan Rules).

Exercise of New Options

Exercising the New Options under the second offer will cause the unexercised Old Options to lapse under the first offer. The Participants will only ever be entitled to exercise one group of unexercised options: either the Old or New Options, but not both.

The Participant would not have disposed of the Old Options nor would they be able to exercise the Old Options. Hence no deferred taxing point will arise.

Ceasing employment

Section 83A-120 of the ITAA 1997 contains the rules for determining when the ESS deferred taxing point occurs for rights to acquire shares. This includes when the employee ceases the employment in respect of which they acquired the rights within the meaning of section 83A-330 of the ITAA 1997.

Previously, the EOP provided that the Board had absolute discretion in relation to Option holder's Options when a Participant ceases employment with the taxpayer. The Board had discretion to cancel the Options, require the Options to be sold, or allow the Participant to retain some or all of his or her Options.

After the amendments to the Old Options, vested and unvested Old Options will automatically lapse when the Participant ceases employment with the taxpayer.

If a Participant ceases employment with the taxpayer and has not at any point exercised the Old (or New), Options, the Old options will lapse so that ceasing employment will not result in an ESS deferred taxing point.

Exit Event

An Exit Event is defined in the EOP to include a listing, a business sale and/or a share sale.

If any of the Exit Events occurred prior to the Old Options being exercised, then the Old Options would lapse and no taxing point will have arisen.

Conclusion

Based on the above no ESS deferred taxing points occur for the Old Options under section 83A-120 of the ITAA 1997 when:

•         exercising the New Options,

•         ceasing employment with the taxpayer; or

•         an Exit Event happening (as defined in the Plan Rules).

As a result, the taxpayer has no reporting obligation under paragraph 392-5(1)(b) of Schedule 1 to the TAA in relation to Old Options that lapse as a result of the above events. This assumes that no ESS deferred taxing point has previously occurred.

For vested Old Options, an ESS deferred taxing point may have already occurred and there would be a reporting obligation in relation to this. If an ESS deferred taxing point has already occurred and an amount has been included in the individual's assessable income, then the individual may be entitled to a refund under section 83A-310 of the ITAA 1997. This is because the individual has made a choice not to exercise the Old Options before they lapse.

Question 4

Summary

The taxpayer is not required to provide a statement to the Commissioner and to the Participant under section 392-5(1)(b) of the TAA for the financial year in which the New Options lapse as a result of the Participant exercising the Old Options under the First Offer.

Detailed reasoning

An entity must give a statement to the Commissioner and to an individual for an income year if all the following requirements are met under paragraph 392-5(1)(b) of Schedule 1 to the TAA:

•         The provider has provided ESS interests to the individual (whether during the year or an earlier year),

•         Subdivision 83A-C of the ITAA 1997(about ESS) applies to the interest, and

•         The ESS deferred taxpayer point for the interests occurs during the year.

The meaning of ESS interest and employee share scheme are discussed at Question 1.

Section 83A-340 of the ITAA 1997 states that, if a beneficial interest in a right is acquired and that right later becomes a right to acquire a beneficial interest in a share, Division 83A of the ITAA 1997 applies as if the right had always been a right to acquire the beneficial interest in the share (i.e. it is treated as having always been an ESS interest). This is called an indeterminate right.

The New Options granted under the EOP represent a right to acquire shares or to receive a cash payment when the New Options are exercised. Therefore, the New Options will be 'indeterminate rights' and therefore be subject to section 83A-340 of the ITAA 1997. They will only be treated as ESS interests when the taxpayer decides to satisfy the exercise of the New Options by issuing shares.

When the Participant submits an exercise notice in respect to the Old Options under the First Offer, the New Options under the Second Offer will automatically lapse. The New Options lapse as indeterminate rights for the purposes of section 83A-340 of the ITAA 1997 and never become an ESS interest.

As a result, the taxpayer is not required to provide a statement to the Commissioner or to the Participant in respect of the New Options under paragraph 392-5(1)(b) of the TAA following the financial year in which the New Options lapse.

[1] This only applies to ESS interests acquired on or after 1 July 2015.

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