Edited version of private advice

Authorisation Number: 1051877300327

Date of advice: 28 July 2021

Ruling

Subject: Application of the start-up concession rules

Question 1

Is the Taxpayer entitled to the start-up concession in section 83A-33 of the Income Tax Assessment Act 1997 in relation to options granted in X, as part of his employment with X Pty Ltd?

Answer

Yes.

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commences on:

The scheme has commenced.

Relevant facts and circumstances

Overview

X (the Taxpayer) is an employee of the Australian Subsidiary.

The Australian Subsidiary conducts a X business.

The Australian Subsidiary is an Australian resident for tax purposes.

The Australian Subsidiary was incorporated on or about X and is a privately-owned company.

The Country A Head Company owns 100% of the ordinary shares in the Australian Subsidiary and is a resident of the Country A.

The Country A Head Company was incorporated on or about X.

The Country A Head Company's annual turnover is less than $XX million.

The Australian Subsidiary, the Country A Head Company and its corporate group have never been listed on a stock exchange.

The Scheme

The Australian Subsidiary intends to implement an ESS.

The Taxpayer may be offered Options to acquire ordinary shares in Country A Head Company as part of his employment in the Australian Subsidiary (the ESS interestor Options).

There is a nominal price to acquire the Options and the exercise price will be equal to or greater than the market value of an ordinary share in the Country A Head Company when the Taxpayer acquires the ESS interest. The Options vest after various years of service.

Immediately after acquiring the Options, the Taxpayer will not hold a beneficial interest in more than 10% of the shares in the Country A Head Company or Australian Subsidiary and will not 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.

The Taxpayer will hold the ESS interests for a minimum holding period of three years (commencing the date the ESS interests were acquired) or until the Taxpayer's employment ceases.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-25.

Income Tax Assessment Act 1997 Section 83A-33.

Income Tax Assessment Act 1997 Section 83A-45.

Reasons for decision

Question 1

Is the Taxpayer entitled to the start-up concession in section 83A-33 of the Income Tax Assessment Act 1997 in relation to options granted in X, as part of his employment with X?

Summary

Yes, the Taxpayer is entitled to the start-up concession in section 83A-33 of the Income Tax Assessment Act 1997 in relation to options granted in X, as part of his employment with X.

Detailed Reasoning

Meaning of ESS interest and Employee Share Schemes

An ESS interest in a company includes a beneficial interest in a right to acquire a beneficial interest in a share in the company (subsection 83A-10(1)(b)). 'The company' in this instance is the Country A Head Company. The Australian Subsidiary is the employer. Options will be issued, which are an ESS interest in the Country A Head Company, as they represent a beneficial interest in a right to acquire a beneficial interest in a share in the Country A Head Company.

An ESS is a scheme under which an ESS interest in a company are provided to employees of the company or its subsidiaries in relation to their employment (subsection 83A-10(2)).

The ESS start-up concession

The ESS start up concession under section 83A-33 operates to reduce the total amount included in the acquirer's assessable income under subsection 83A-25(1) as the discount on the ESS interest, by the total of the amounts calculated under that subsection. It is therefore a concession to the employee.

To be eligible for the 'start-up' tax concession certain eligibility criteria under section 83A-33 and the further conditions under section 83A-45 must be met.

As the ESS interests here are options and not beneficial interests in shares, subsection 83A-105(2) (about broad availability of schemes) does not apply.

Section 83A-33

Under the primary conditions in section 83A-33:

• The company that grants the ESS interest (and its corporate group) must not have any interests listed on an approved stock exchange in the income year prior to the ESS interest being offered. (subsection 83A-33(2)).
• The company (and its connected entities) must have been incorporated for less than 10 years (subsection 83A-33(3)).
• The company that grants the ESS interests must have had an aggregated turnover of less than $50 million in the income year prior to the year the interests are granted. The turnover test includes connected entities (subsection 83A-33(4)).
• In the case of an ESS for options (i.e. a beneficial interest in a right), the exercise price must not be less than the market value of shares in the company at the date of grant of the options (subsection 83A-33(5)).
• In the case of an ESS that is a share plan, the shares must not be offered for more than a 15% discount on the market value of the shares at the date of grant (subsection 83A-33(5)).
• The employing company (which can be a subsidiary of the company granting the ESS interests) must be an Australian resident taxpayer (subsection 83A-33(6)).

Application to the Taxpayer

In this instance:

• The Country A Head Company (and its corporate group) are privately held companies; therefore none are listed on any stock exchange.
• The Australian Subsidiary was incorporated on X, and the Country A Head Company was incorporated on X. They were therefore both incorporated less than 10 years ago.
• The Country A Head Company will have an aggregated turnover of less than $50M in the income year prior to the year the interests are granted.
• The exercise price the Country A Head Company will set, will be equal to or greater than the market value of shares in the Country A Head Company at the date of grant of the options.
• The ESS interests issued by the Country A Head Company under the ESS are rights.
• The employing company, being the Australian Subsidiary, has been an Australian resident from its incorporation date.

The primary conditions under section 83A-33 are therefore met for the Taxpayer.

Section 83A-45 criteria

In addition, there are further eligibility criteria set out under section 83A-45 that must be met, which are:

• The acquirer must be employed by the company that issued the ESS interest, or a subsidiary of that company, when their ESS interest was acquired (subsection 83A-45(1)).
• The ESS must only relate to the issue of "ordinary" shares (subsection 83A-45(2)).
• The acquirer must satisfy an integrity rule that is designed to prevent contrived schemes which provide employees with shares in unrelated companies. Such schemes involve creating a company within the group that principally engages in trading or investing in the unrelated shares. The created company also employees the taxpayer under the scheme (subsection 83A-45(3)).
• The acquirer must satisfy the minimum holding period of three years, subject to some exceptions. This requires the employee to hold their ESS interest for this period, but it also requires the scheme to provide the same minimum holding period for all other acquirers during the taxpayer's three-year period (subsection 83A-45(4)) and subsection 83A-45(5)).
• There is a 10% limit on the shareholding and voting power that the employee/associate can have under the ESS (subsection 83A-45(6)).

Application to the Taxpayer

In this instance:

• The Taxpayer will be employed by the Australian Subsidiary when they acquire the ESS interest(s).
• The Country A Head Company will only issue ordinary shares under the ESS. The only ESS interests that will be acquired by the Taxpayer under the plan are options to acquire ordinary shares in the Country A Head Company.
• The Country A Head Company and Australian Subsidiary do not engage in the trading or investing of unrelated shares.
• The Taxpayer will hold their interests for a period of at least 3 years.
• The Taxpayer (including their associates) does not hold more than 10% ownership in the Country A Head Company.

The conditions imposed by section 83A-33 and section 83A-45 are therefore met in relation to the for options issued in the Country A Head Company in relation to the Taxpayer's employment in the Australian Subsidiary.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).