Edited version of private advice

Authorisation Number: 1052167644773

Date of advice: 14 September 2023

Ruling

Subject: Commissioner's discretion - employee share option plan

Question

Will the Commissioner exercise his discretion under paragraph 83A-45(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow the minimum holding period for Relevant Options granted to Qualifying Option Holders to end immediately prior to the completion of the Event?

Answer

Yes.

This ruling applies for the following period:

xx 20xx to xx 20xx.

The scheme commenced on:

xx 20xx

Relevant facts and circumstances

The company is an Australian private company that has not been listed on a stock exchange.

Option Plan

The company established an Employee Share Option Plan (ESOP) to incentivise and retain key employees.

The ESOP is governed by the ESOP rules (Rules).

The company made grants of options over ordinary shares (Options) to employees under the ESOP.

No Vested Options have ever been exercised. That is, all issued Options (other than those that have lapsed due to a Participant ceasing employment with the company) remain on issue.

Options granted under the ESOP

The company has periodically granted Options to employees.

No equity interests in the company (or any subsidiary of the company, holding company of the company or subsidiary of the holding company of the company) have ever been listed on the official list of any approved stock exchange.

No subsidiary of the company, holding company of the company or subsidiary of any holding company of the company had been incorporated for more than 10 years prior to the date being the end of the most recent income year before the last batch of Options which qualified for the start-up concessions were acquired by Participants.

The company had aggregated turnover of less than $XX million for the income years in which the Options which qualified for the start-up concessions were issued.

The amount that must be paid by Qualifying Option Holder to exercise each Option is greater than or equal to the market value of an ordinary share in the company when the Options were acquired.

All Options issued under the Rules are subject to the 3 year disposal restrictions contained in the relevant clauses of the Rules.

Proposed Acquisition

The company received a non-binding offer from an unrelated third party (Purchaser)regarding a potential acquisition of 100% of the share capital of the company.

The Purchaser provided the company with a written non-binding offer (NBO) regarding the Proposed Acquisition. The company accepted this NBO.

The purchase of the share capital of the company is expected to occur under a negotiated Share Purchase Agreement.

Qualifying Option Holders and Relevant Options

The term "Qualifying Option Holders" refers to Participants who acquired Options (or are treated as having acquired Options for the purposes of Division 83A by the application of section 83A-35 of the ITAA 1997) under the ESOP which satisfied subsection 83A-33(1) at the time (and immediately after) acquisition.

The term "Relevant Options" refers to any Options held by a Qualifying Option Holder that were acquired less than three years prior to the date of completion of the Proposed Acquisition.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 83A-33

Income Tax Assessment Act 1997 section 83A-35

Income Tax Assessment Act 1997 section 83A-45

Income Tax Assessment Act 1997 subsection 83A-45(4)

Income Tax Assessment Act 1997 subsection 83A-45(5)

Income Tax Assessment Act 1997 paragraph 83A-45(5)(a)

Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(i)

Income Tax Assessment Act 1997 subparagraph 83A-45(5)(a)(ii)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Section 83A-25 provides that your assessable income for an income year in which an ESS interest is acquired includes the discount given in relation to the interest. Sections 83A-33 (start-ups) and 83A-35 (other cases) provide for a reduction of the amount of the discount included in your assessable income provided, among other things, the further conditions in section 83A-45 are satisfied.

One of the conditions in section 83A-45 is the minimum holding period condition under subsection 83A-45(4) which requires the ESS to be operated with a minimum holding period for the acquirer of an ESS interest during which the acquirer is not permitted to dispose of the ESS interest. Subsection 83A-45(5) provides the minimum holding period is 3 years or such earlier time that the Commissioner allows:

Minimum holding period

(4) This subsection applies to an ESS interest you acquire under an employee share scheme if, at all times during the interest's minimum holding period, 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 interest's minimum holding period.

(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; and

(b) when the acquirer of the interest ceases being employed by the relevant employer.

Disposals

The Rules of the ESOP contain the relevant clauses for disposals of a legal or beneficial interest in an Option or Option Share. Further, the Rules contain an overriding restriction on any disposal in the first 3 years which reflects the minimum holding period provided for in paragraph 83A-45(5)(a), unless the Commissioner allows an earlier time by exercising his discretion. The relevant clauses in the ESOP Rules are designed to ensure the ESOP complies with the requirements in subsections 83A-45(4) and (5).

Conclusion

There was no disposal or transfer of Options or Option Shares acquired under the ESOP prior to the date of the Proposed Sale.

The ESOP Rules which permit disposal of the Options or Option Shares are expressed to be subject to the relevant clauses, which provide an overriding restriction on disposal to ensure the ESOP complies with the minimum holding period requirement of 3 years in subsections 83A-45(4) and (5).

The Commissioner is therefore satisfied that the ESOP Rules prevented Option Holders disposing of Options acquired until the earlier of the 3-year anniversary of the date the Options were granted or the day after the date they ceased to be employed by the Company. The ESOP Rules did not provide for an exemption from or non-compliance with this rule and there is no evidence to suggest that the Company (or its Board), as operators of the ESOP, did not intend for every Option Holder under the ESOP to be restricted from disposing their Options for that minimum holding period.

Further, all Options were acquired by the Option Holders under the ESOP prior to the Company having been approached by the Purchaser and having entered into any negotiation with the Purchaser regarding the Purchaser's acquisition of all the Company's issued capital under the Proposed Sale.

Accordingly, the Commissioner is satisfied that the requirements of subparagraphs 83A-45(5)(a)(i) and (ii) are met to the extent Share Options are disposed of during their original minimum holding period of 3 years, and will allow the minimum holding period to end an earlier time, being the date of the Proposed Sale.

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