Edited version of private advice

Authorisation Number: 1052159487071

Date of advice: 25 August 2023

Ruling

Subject: Employee share schemes

Question: Is the Employee share scheme discount amount assessable in the ruling period?

Answer: Yes.

This ruling applies for the following period:

20XX-XX income year.

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances

You were employed by Company A, with your employment being undertaken solely in Australia.

During your employment with Company A, you participated in several employee share schemes offered prior to and after the following plans offered in prior to the ruling period in 20XX and 20XX (collectively referred to as the Awards):

•                     Award A which:

-        was granted as a discretionary incentive award

-        gave you an unsecured right to receive one registered share

-        did not require you to pay any consideration for the issuing of the registered share upon settlement of the Award; and

-        would be settled by the payment of one registered share, with no shareholder rights until the settlement.

•                     Award B which:

-        gave you an unsecured right to received one registered share

(i)    would vest as over three years, with one-third vesting in each year, subject to your continued employment; and

-        would be settled by payment of one registered share.

Company A issued a statement advising that settlement for the Awards had occurred on Date 1, being some years after they had been granted, with a specified number of shares (the Shares) being transferred into your account.

There were no selling restrictions in relation to the Shares after Date 1.

Company A reported that a specified employee share scheme discount amount had arisen in relation to the Awards that was taxable in the ruling period.

During the following year, Company XYZ agreed to buy Company A.

After some months, Company A issued a memorandum indicating that rights you had granted under awards in years after the Awards were granted would be written down to zero.

The closing date for the Takeover occurred on Date 2. Each Company A share issued immediately prior to the completion of the Takeover entitled the Company A shareholders to receive a specified number of Company XYZ shares for every Company A share. Holders of certified Company A ordinary shares had to surrender their share certificates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-110

Income Tax Assessment Act 1997 section 83A-120

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise noted.

Employee Share Schemes (ESSs)

Division 83A applies to shares, rights and stapled securities acquired under an ESS on or after 1 July 2009.

An ESS is defined in subsection 83A-10(2) 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.

An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in:

(a)          a share in the company; or

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

Deferred ESS

Subdivision 83A-C allows for the deferral of tax on the ESS discount amount assessable in respect of an ESS interest if certain conditions are satisfied.

Section 83A-120 determines the ESS deferred taxing point (DTP) for ESS interests constituted by a beneficial interest in shares, such as a right to acquire shares.

Under subsection 83A-120, the DTP for rights to acquire shares is the earliest of when:

•                     the real risk of forfeiture and any genuine selling restrictions on the rights end

•                     when your employment ends

•                     when you exercise the right, there is no real risk of forfeiting the resulting share and the scheme no longer genuinely restricts disposal of that share; or

•                     15 years after you acquired the right.

Amount to include in assessable income

Subsection 83A-110(1) provides that your assessable income for the year that the DTP occurs includes the ESS discount arising in relation to the ESS interest calculated as the market value of the ESS interest (calculated at the DTP) reduced by the cost base of the interest.

After the ESS discount is assessed under the ESS provisions, the general capital gains tax provisions will apply to the ESS interests. The interest is taken to have been acquired (or re-acquired) at its market value, it is then taxed under the CGT regime or other regimes such as the trading stock rules. This is relevant to an employee's ability for the capital gains tax discount on a later disposal of the ESS interest, such as a resulting share.

Application to your situation

You participated in deferred ESS plans offered by Company A, referred to as the Awards, under which you obtained rights to acquire ordinary Company A shares.

Settlement for rights granted in the Awards occurred on Date 1, several years after the rights were granted, and you received a specified number of shares (the Shares) in relation to those rights.

The DTP for those rights occurred in the income year covered by the ruling period with Company A reporting the ESS discount amount arising in relation to those rights as being assessable in that income year.

Based on the information provided:

•                     there were no selling restrictions in relation to the Shares after Date 1, however you chose not to sell them

•                     nothing has been provided to support that Company A had incorrectly calculated the ESS discount amount; and

•                     the DTP for the rights to acquire the Company A shares under the Awards occurred prior to the Takeover and as it had occurred prior to the Takeover there is no rollover relief under the ESS provisions in relation to those shares as a result of the Takeover.

There are no legislative provisions, and the Commissioner does not have any discretion, that would allow you to disregard the ESS discount amount so that you don't have to include it in your income tax return. Therefore, the ESS discount amount must be reported in the income year covered by the ruling period.

Note: When the Takeover occurred and you received Company XYZ shares in exchange for your Company A shares acquired under the Awards, for capital gains tax purposes you are viewed as having disposed of your Company A shares and acquired the Company XYZ shares.

When calculating whether you have made a capital gain or capital loss from the disposal of those Company A shares because of the Takeover, your capital proceeds will be the market value of the Company XYZ shares received in the Takeover at the time of the disposal of the Company A shares.

Any capital gain or capital loss is made at the time of the disposal of the Company A shares.

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