Edited version of private advice

Authorisation Number: 1052262525346

Date of advice: 17 June 2024

Ruling

Subject: Employee share scheme

Question 1

In what income year are you required to include in your assessable income under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) the deferred discount associated with the employee share scheme (ESS) interests that vested in the 2023 and 2024 income years under the Company ESS?

Answer

20XX income year

This ruling applies for the following periods:

Income year ending 30 June 2022

Income year ending 30 June 2023

Income year ending 30 June 2024

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

1.      B was employed with the Company.

2.      B received rights under various ESS.

3.      Under each ESS, B was granted rights to acquire ordinary shares in the Company (ESS rights).

4.      Each ESS had either performance conditions or service conditions (or both) that had to be met.

5.      B ceased employment with the Company.

6.      At the time B ceased employment some of their ESS rights had not vested because of performance conditions which had not been met.

7.      Although B had ceased employment with the Company their ESS rights remained on foot after their employment ended.

8.      Some of B's ESS rights vested in the 2022, 2023 and 2024 income years.

9.      Each of the ESS were tax deferred schemes.

Relevant legislative provisions

Division 83A of the Income Tax Assessment Act 1997

Section 83A-10 of the Income Tax Assessment Act 1997

Section 83A-25 of the Income Tax Assessment Act 1997

Subdivision 83A-C of the Income Tax Assessment Act 1997

Section 83A-110 of the Income Tax Assessment Act 1997

Section 83A-120 of the Income Tax Assessment Act 1997

Reasons for decision

The ESS provisions are contained in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 83A-10(2) of the ITAA 1997 provides that an employee share scheme is a scheme under which ESS interests in a company are provided to employees. Subsection 83A-10(1) states that an ESS interest in a company is a beneficial interest in:

(a)  a share in the company, or

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

Subsection 83A-25(1) of the ITAA 1997 provides that your assessable income for the income year in which you acquire an ESS interest includes the discount in relation to the interest.

However, where the requirements of Subdivision 83A-C of the ITAA 1997 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 interest but is included when the deferred taxing point occurs. Subsection 83A-110(1) of the ITAA 1997 states that your assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest.

The deferred taxing point for an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share that was granted on or after 1 July 2015 will be the earliest of the times in accordance with subsections 83A-120(4) to (7) 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, and the scheme no longer genuinely restricts disposal of the ESS interest (subsection 83A-120(4) of the ITAA 1997); or

•         when the employment in respect of which you acquired the interest ends (subsection 38A-120(5) of the ITAA 1997 - this subsection is repealed from 1 July 2022)

•         the end of the 15-year period starting when the employee acquired the ESS interest (subsection 83A-120(6) of the ITAA 1997); or

•         when the ESS interest is exercised and there is no real risk of forfeiting the share and the scheme no longer genuinely restricts disposal of the share (subsection 83A-120(7) of the ITAA 1997).

Application to your circumstances

The rights granted to you under each of the ESS are ESS interests for the purposes of section 83A-10 of the ITAA 1997, they are a beneficial interest in a right to acquire a beneficial interest in a share in the Company. The ESS are tax deferred schemes, and you do not include the discount related to your ESS interests in your tax return for the income year you received the ESS interests. Subdivision 83A-C applies to your ESS interests.

Subsection 83A-110(1) of the ITAA 1997 requires that you include the market value of your ESS interests in the income year of the ESS deferred taxing point. The ESS deferred taxing point for your ESS interests will be the earlier of the taxing points referred to in subsection 83A-120(2) of the ITAA 1997. In your circumstances, the relevant deferred taxing point is that set out in subsection 83A-120(5) of the ITAA 1997, when your employment ended (subsection 83A-120(5) was still in force at that time). The conditions of the other deferred taxing points referred to in subsection 83A-120(2) were not met at the time you ceased your employment.

In accordance with subsection 83A-110(1) of the ITAA 1997 you will need to include the market value of your ESS interests in your assessable income in the income year when your employment with the Company ended.

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).