Edited version of private advice

Authorisation Number: 1052135108486

Date of advice: 6 July 2023

Ruling

Subject: Employee share scheme - minimum holding period

Question

Will the Commissioner allow the minimum holding period for ESS intereststo be reducedin accordance with sub-paragraph 83A-45(5)(a)(ii) of the ITAA 1997?

Answer

Yes. For the purposes of section 83A-45(4) of the ITAA 1997, the Commissioner will exercise his discretion under paragraph 83A-45(5)(a) 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 Company by the Purchaser.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Background

The Company is an Australian resident private company.

The Company has made grants of options to employees (participants) that were intended to qualify for the start-up concessions under Subdivision 83A-B of the ITAA 1997.

The grants were made under the Employee Option Plan (the Plan).

The grants of options are governed by an employee share option plan (the Plan).

For the purpose of satisfying the 3-year minimum holding period requirement for options under the start-up concessions the offer letter provides that a Participant must not dispose of his or her legal or beneficial interest in an Option or Option Share (other than a disposal in accordance with section 83A-130 of the ITAA97) until the earlier of:

(a) 3 years after the issue of the Option or such earlier time as the Commissioner of Taxation allows in accordance with section 83A-45(5) of the ITAA 1997; and

(b) where the Optionholder or Participant or associated with that Optionholder becomes a Leaver.

The Company has stated at all times the Company has operated the Plan (in accordance with rule 4.4 of the Plan Rules) such that all options and shares would not be permitted to be disposed of during the minimum holding period in accordance with the requirement in subsections 83A-45(4) and (5) of the ITAA 1997.

The company has confirmed that at the time the final tranche of Options were granted there was no indication that a 100% sale of the Company would occur.

The Transaction

The company started negotiations with the Purchaser in respect of sale of all the shares in the Company.

The Company accepted an offer from the Purchaser to acquire 100% of the membership in the Company.

The Transaction was completed on the Completion Date.

At the Completion Date, the Options were exercised and sold to the purchaser.

The exercise of the Options in connection with completion fell within 3 years of the grant of all Options issued under the Plan.

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 section 83A-130

Reasons for decision

The Company has made grants of Options to participants that were intended to qualify for the start-up concessions under Subdivision 83A-B of the ITAA 1997.

The Company has stated at all times the Company has operated the Plan (in accordance with the Plan Rules and the offer letter) such that all Options and Shares would not be permitted to be disposed of during the minimum holding period in accordance with the requirement in subsections 83A-45(4) and 83A-45(5) of the ITAA 1997.

The Company accepted an offer from the Purchaser to acquire 100% of the membership in the Company.

Immediately prior to completion of the Transaction, the Optionholders will exercise their Options and be issued shares by the Company. The Optionholders will sell their shares to the Purchaser on completion of the Transaction

All of the issued shares in the Company will be sold to the Purchaser, which will acquire 100% of the membership interests in the Company on completion of the transaction.

The cancellation of the Options in connection with completion fell within 3 years of the grant of all Options issued under the Plan.

The Company has requested that the Commissioner exercise his discretion under section 83A-45(5) of the ITAA97 to allow the minimum holding period for all Options granted under the Plan to be reduced, such that the Options can be cancelled at the earlier time in connection with the completion of the transaction without breaching the minimum holding period condition.

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

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

83A-45(4)

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.

83A-45(5)

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 (4) to apply to the interest during the 3 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.

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 of 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 is not the case, the Commissioner will exercise his discretion to allow the reduced minimum holding period to apply.

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