Edited version of private advice

Authorisation Number: 1051814662142

Date of advice: 16 March 2021

Ruling

Subject: Employee share scheme

Question 1

Did you acquire the awards under the Plan at a discount to their market value?

Answer

Yes.

Question 2

Did the deferred taxing point in relation to your unvested employee share scheme interests occur when your employment ceased?

Answer

Yes.

Question 3

Did the taxing point for the employee share scheme interests granted after your employment ceased occur in the income year in which they were granted?

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

While you were an employee of Company X, you participated in annual bonus scheme offered by them, being the Plan.

A fact sheet was provided in relation to the Plan for employees who were not employees of an overseas country which included the following information:

•         Company X Group operates mandatory deferral arrangements as an integral element of their remuneration policy

•         Under the Plan, remuneration included incentive awards in relation to Performance Years,

•         Thresholds and deferral rates applied

•         Deferred awards will be delivered in a mixture of both Company X Group shares and funds, providing the deferral meets the de minimis threshold

•         The deferral period was three years, with awards vesting and becoming available for release in three equal tranches at the first, second and third anniversary of the date of grant. During the vesting period the Deferred awards will be held within the Plan Trust

•         Employees could elect in which form they wished to split their monetary deferral amount with the default position if no instruction is made of equal portions of stock and funds

•         Once awarded, the employee had the ability to switch into alternative Company X funds, however there is no option to switch to stock

•         If a participant ceases, or gives or receives notice to cease, employment with any company within the Company X Group before the end of the relevant vesting period, any unvested awards may be forfeited in full

•         If the cessation of employment, or giving or receiving of notice, is by reason of retirement, the participant will remain eligible to receive Deferred awards which will be released subject to the Plan rules at the scheduled vesting dates; and

•         Unvested awards are also subject to malus (forfeiture).

You received Awards under the Plan in relation to the 20XX to 20XX Performance Years in the form of

•         20XX Performance Year - Discretionary Annual Bonus Award consisting of:

-        Cash; and

-        Deferred shares with the default being that the Deferred award was in the form of share under the Plan. The shares issued during the following year and had a vesting period of three years.

•         20XX Performance Year - Discretionary Annual Bonus Award consisting of:

-        Cash; and

-        Deferred award, which was in the form of stock. Shares were issued in the following year in relation to the Deferral award with half vesting in two years and the remainder vesting in three years.

•         20XX Performance year - Discretionary Annual Bonus Award consisting of:

-        Cash

-        Deferral shares in the form of stock. Shares were issued in relation to the Deferral shares in the following year with a portion of the shares vesting in each of the following three years; and

-        Deferral funds which were deferred under Company X's deferral rules and was in the form of Company X funds.

You notified Company X that you would be retiring and tendered your resignation.

You signed a Deed of Separation and Mutual Release (the Deed) which included the following information:

•         You were eligible for a discretionary bonus award under Company X's bonus scheme during the first quarter of the following year in relation to the 20XX Performance Year, being the year in which you entered the Deed

•         The Board of the Company X Group would grant you good leaver status due to your retirement under the rules of the Plan in relation to any remaining unvested Deferred awards; and

•         In relation to the discretionary bonus, you were eligible for one during the first quarter of the following year and that any portion of any award or payment could be paid in the form of shares in the Company X Group or other instruments at Company X's discretion.

Tax was withheld on the cash amounts you received under the Plan which you reported in your income tax returns.

You elected to have the shares granted under the Plan sold and receive the sale proceeds in cash, which you have reported in your income tax returns.

You ceased your employment with Company X several months after you lodged your resignation notification with them.

You met the necessary Plan retirement conditions in relation to your Awards and the 'good leaver' policy was applied by Company X in relation to your unvested Deferred awards as at the time you retired. Accordingly, you were able to keep those unvested awards which would continue to vest according to their vesting schedule.

During the following year, Company X sent you a statement in relation to the last Performance Year, being the last year of your employment, outlining that you were awarded a Discretionary Annual Bonus Award comprising of the following:

•         Cash; and

•         Equal awards of

-        Deferral shares to which the standard deferral rules applied; and

-        Deferral funds which were deferred under Company X's deferral rules and delivered as funds.

You were awarded shares relating to the last Performance year during the year after your employment had ceased, with a third of the shares having a vesting date in each of the following three years.

You signed Certificates of satisfaction of Post-employment conditions in relation to some of the shares you were awarded.

Company X issued an ESS Statement to you for the 20XX-XX income year which outlined that the ESS discount amount of $XXX,XXX should be included in your 20XX-XX income tax return at Label F for discount from deferral schemes.

Company X reported ESS discount amounts in relation to each of the Awards you received prior to your employment ending, and those awarded after your employment had ended, with the total ESS discount amount $XXX,XXX, with the type of ESS being deferral.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subdivision 83A-C

Reasons for decision

You participated in the Plan offered by your then employer and qualified for Awards in several years and you state that:

•         The Plan is not an employee share scheme because there was no discount, with the shares being purchased on your behalf at the prevailing market value

•         The Award was earned as income and should be taxed when it was received as had been the approach by your former employer during your employment; and

•         Your former employer has applied employee share scheme rules in relation to your retirement which you do not believe is the correct approach.

We have considered the application of the employee share scheme provisions to your situation in relation to the following ruling questions:

Question 1: Did you acquire the awards under the Plan at a discount to their market value?

Employee share schemes

The employee share scheme (ESS) provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) and applies to ESS interests acquired under an ESS at a discount.

An ESS is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees, of the company, or a subsidiary of the company, in relation to the employee's employment.

In summary, the ESS provisions recognise the dual nature of grants of shares or options to acquire shares (collectively known as 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 a share or right to acquire the share in their assessable income

•         Calculating the amount of this discount using the market value of the share or right to acquire the share at this date ignoring any selling restrictions or forfeiture conditions, and

•         Using this date and the market value of the share or right as the acquisition date and amount paid for it for all other income tax purposes.

The term 'discount' is not defined for the purposes of Division 83A of the ITAA 1997. However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 states at paragraph 1.102 that the term 'discount' is:

... the market value of the ESS interest less any consideration paid, or to be paid, by the employee.

When the taxpayer does not pay any consideration to acquire the ESS interests, the discount will be equal to their market value.

Application to your situation

The performance measures were met in relation to the Plan and you qualified for the Awards being offered by Company X under the Plan during several years.

Under the Plan employees could elect how they wanted to receive the part of the Award in relation to the monetary deferral amount and you received the following:

•         20XX Performance year, issued during the year after the end of the Performance year, with the majority of the Award in cash and the remaining portion in the form of Deferred Award with the default being that they were in the form of shares. The Award date of the shares was during the following year after the relevant Performance year; and

•         20XX Performance year, issued during the year after the end of the Performance year, with the majority of the Award in cash and the remaining portion in the form of Deferral shares. The Award date of the shares was during the following year after the relevant Performance year.

You included the cash amounts in your income tax returns in the income years they were received and have been taxed on those amounts.

Part of the remaining portion of Award in each year were pre-tax amounts, being the Deferred Award, that was used to buy shares that were placed in the Plan trust until they either vested or were/are forfeited by you.

When determining the ESS discount amount both cash and non-cash consideration, other than consideration in the form of services, is deducted from the value of the ESS interests for taxable value.

Based on the information provided it is viewed that the pre-tax amounts take the nature of being consideration for your services in relation to your employment. Accordingly, as these amounts related to your service in relation to your employment, they are not viewed as being consideration that you had paid to acquire the shares under the Plan. Therefore, the shares were acquired at a discount, being at their market value with no consideration paid, and the Deferred Awards are ESS interests.

Question 2: Did the deferred taxing point in relation to your unvested ESS interests occur when your employment ceased?

Tax deferred ESS

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, being under a taxed upfront ESS, but will be included when the deferred taxing point occurs.

The following requirements must be satisfied for an ESS to be a tax deferred ESS:

1.    The taxed upfront provisions contained in Subdivision 83A-B of the ITAA 1997 do not apply.

2.    From the 2011-12 income year the discount must remain after applying the market value test in section 83A-315 of the ITAA 1997.

3.    From 1 July 2015, the start-up concession in section 83A-33 of the ITAA 1997 does not reduce the taxpayer's assessable income for the interest.

4.    For ESS interests acquired from 1 July 2015, paragraph 83A-105(1)(b) of the ITAA 1997 states that the fourth requirement for deferred taxation is that the an additional four conditions in section 83A-45 of the ITAA 1997 must be met which includes that the taxpayer must be employed by the company issuing the ESS interests or its subsidiary (subsection 83A-45(1) of the ITAA 1997); and

5.    If the interest is a beneficial interest in a share, the taxpayer and the ESS must meet the condition in subsection 83A-105(2) of the ITAA 1997 that the deferred ESS meets the 'broad availability of schemes' condition contained in, and passes either of the following tests:

•         The 'real risk of forfeiture' test under subsection 83A-105(3)(a) of the ITAA 1997 where there must be a real risk that the ESS interest will be forfeited or lost, other than by disposing of it; or

•         The 'salary sacrifice arrangement' test under subsection 83A-105(4) of the ITAA 1997.

Deferred taxing point

The ESS discount amount to be included in assessable income under a deferral ESS is the market value of the ESS interest at the deferred taxing point (DTP) reduced by the cost base of the ESS interests under subsection 83A-110(1) of the ITAA 1997.

The DTP for an ESS interest that is a beneficial interest in share that was granted on or after 1 July 2015 will be the earliest of the times provided in subsections 83A-115(4) to (6) of the ITAA 1997, summarised as follows:

•         When the ESS interest has not been exercised, there is no real risk of forfeiting the ESS interest, other than by disposing of it, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-115(4) of the ITAA 1997)

•         The end of the 15-year period starting when the Employee acquired the ESS interest (subsection 83A-115(6) of the ITAA 1997); and

•         When the Employee ceases the relevant employment (subsection 83A-115(5) of the ITAA 1997).

Employment

The term 'employment' is not directly defined for the purposes of Division 83A of the ITAA 1997. However, section 83A-330 of the ITAA 1997 provides that for the purpose of Division 83A you will only be treated as ceasing employment when you are no longer employed by any of the following:

a)    your employer in that employment;

b)    a holding company of your employer

c)    a subsidiary of your employer

d)    a subsidiary of a holding company of your employer.

Employment is tested at the time the taxpayer acquired the ESS interest/s.

Application to your situation

Based on the information provided the Awards related to ordinary shares, the ESS interests were acquired at a discount, the Plan rules contained forfeiture provisions in relation to unvested awards. The Awards were referred to as Deferred Awards by Company X that vested over a period of years. Therefore, as Company X had identified the Plan as being a deferral scheme, and the Plan had met the relevant conditions, it is a deferral ESS and the ESS discount amounts arising in relation to those ESS interests would be assessed in the income year when the DTP occurred.

You ceased your employment with Company X and under the good leaver policy you continued to hold the unvested awards, ESS interests, after your employment ended, to vest in accordance with the vesting schedule. The unvested awards were subject to forfeiture conditions.

When considering when the DTP for your ESS interests occurred, the first event to occur under subsections 83A-115(4) to (6) of the ITAA 1997 as provided above was when you ceased your employment with Company X as the other two conditions had not occurred at the time you ceased your employment. That is, neither the 15-year period from the date you acquired the ESS interests had occurred and your unvested ESS interests had not ceased being still at risk of being forfeited prior to the date your employment ended.

Your former employer has reported ESS discount amounts for the 20XX-XX income year to us in relation to your ESS interests acquired under the Plan. Based on the information supplied with this ruling, nothing has been provided to support that your former employer has incorrectly reported the ESS discount amounts related to these deferred ESS interests to us in the 20XX-XX income year.

You have not provided any information to support that you would be able to wait until the shares vested in later income years before you needed to declare the ESS discount amounts arising in relation to your deferred ESS interests. Additionally, nothing is provided in either the fact sheet or the Plan rules to support this course of action.

Therefore, it is viewed that the ESS discount amounts arising in relation to the unvested ESS interests at the time your employment ceased are assessable in the 20XX-XX income year, being the income year in which the DTP occurred.

Question 3: Did the taxing point for the ESS interests granted after your employment ceased occur in the income year in which they were granted?

Taxed upfront ESS

Taxed upfront ESS, as covered under Subdivision 83A-B of the ITAA 1997, are the default position for assessing ESS unless the conditions for deferral under Subdivision 83A-C of the ITAA 1997 have been met.

The discount received by an employee under a taxed upfront ESS is taxed in the income year in which the ESS interest is acquired. The discount is the market value of the ESS interest under section 83A-25 of the ITAA 1997.

There are two types of taxed upfront ESS, being

•         Taxed upfront - not eligible for reduction; and

•         Taxed upfront - eligible for reduction

A taxpayer may be entitled to reduce the discount included in their assessable income if one of two sets of conditions is satisfied, namely:

i.      The ESS interests are in a 'start up' company and all of the requirements in section 83A-33 of the ITAA 1997 are satisfied in which case the employee will be eligible to the start-up concession; or

ii.     The taxpayer and the ESS meet a number of conditions in section 83A-35 of the ITAA 1997 in which case discounts of up to $1,000 may become tax-free. To be eligible, the employee must meet the income test and the sum of the employee's taxable income, reportable fringe benefits total, reportable superannuation contributions and total investment loss for the relevant income year must be less than $180,000 under section 83A-35(2) of the ITAA 1997.

Application to your situation

The Plan Awards were determined on an annual basis, being the Performance year, and it was determined whether the performance measures had been met at the end of each year, when it was identified if any awards would be issued.

Application to your situation

The DIP Awards were determined on an annual basis and it was determined whether the performance measures had been met at the end of each year, when it was identified if any awards would be issued.

You ceased your employment and were awarded the following after your employment had ended:

•         20XX Performance year, issued during the year after the end of the Performance year, with the majority of the award in cash, with the remaining in equal portions consisting of Deferral shares with the scheduled vesting dates for one third of those shares to occur in each of the following three years, and Deferral funds.

Based on the information provided you were not an employee of Company X when you were granted the above Deferral shares and did not meet the conditions contained in subsection 83A-45(1) of the ITAA 1997 for the discount arising in relation to those ESS interests to be assessed on a deferral basis.

As outlined above, the default position is for the taxed upfront ESS provisions to apply unless the deferral ESS provisions apply. Accordingly, as you did not meet the necessary conditions for a deferral ESS in relation to the Deferred shares granted after you ceased your employment they will be assessed in the income year in which they were awarded under the taxed upfront ESS provisions.

Company X reported ESS discount amounts to us as being taxable in the 20XX-XX income year in relation to the Awards made to you after your employment had ceased. While Company X had indicated that the ESS was a deferral ESS, the conditions for a deferral ESS were not met in relation to the shares as indicated above. However, it is viewed that Company X had correctly reported the ESS discount amounts in relation to the shares to us in the income year in which the ESS interests were awarded to you, being appropriate given that the ESS would be a taxed-upfront ESS as it cannot be a deferral ESS.

In addition to the shares you received Deferral funds as part of your Award after you ceased employment. As outlined in the Deed of Separation and Mutual Release you signed:

•         You were eligible for a discretionary bonus during the first quarter of the year following the Performance Year; and

•         Any proportion of any award or payment may at the Employer's discretion be paid in the form of shares or other instruments. The Employer may require the Employee to defer a proportion of any award or payment into the Company X Group's deferral scheme from time to time in force.

The way that Company X had reported the ESS discount amounts in relation to the Deferral funds in the 20XX-XX income year supports that they had exercised their discretion and had paid you the Deferral funds in shares, which are ESS interests assessable as taxed upfront ESS for the reasons provided above.

Nothing has been provided to support that your former employer has incorrectly reported the ESS discount amounts related to these ESS interests to us in the 20XX2XX income year. Therefore, we do not have sufficient information on which to base a decision that Company X had incorrectly reported the ESS discount amounts in relation to your Awards.

After reviewing the facts of your situation, it is viewed that the ESS discounts arising in relation to the Awards granted to you after your employment ceased are assessable in the income year in which the shares were awarded in accordance with the provisions for taxed-upfront ESS contained in Subdivision 83A-B of the ITAA 1997 as you no longer met the conditions to be eligible to a deferral ESS.

Note: You are not eligible to the taxed upfront - eligible for reduction provisions because you do not meet the conditions contained in section 83A-35 of the ITAA 1997 as based on the information provided you do not meet the income test given that your annual salary for the income year is greater than $180,000. Therefore, you cannot reduce the ESS discount by $1,000.

Conclusion

After reviewing the facts of your situation and considering the information provided:

•         The Awards were granted at a discount and are ESS interests assessable in accordance with the ESS provisions

•         The ESS discount arising in relation to the Awards granted to you prior to your employment ceasing are assessable in the income year in which the DTP occurred, being the income year in which your employment ceased; and

•         The ESS discount arising in relation to the Awards granted to you after your employment ceased will be assessed in the income year in which they were granted.

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