Edited version of private advice

Authorisation Number: 1052350297195

Date of advice: 24 February 2025

Ruling

Subject: Employee Share Scheme

Question 1

Are the Options acquired by you (but XX% beneficially owned by another entity) included in your assessable income?

Answer 1

Yes.

If an associate of yours acquires the beneficial interest in the Employee Share Scheme (ESS) interests which are provided in relation to your employment or services, the ESS rules require you (rather than your associate) to include the discount in your assessable income.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

XX June 20XX

Relevant facts and circumstances

You are an XXX tax resident.

You have been engaged by Company A as an independent consultant, under your sole proprietorship, (Company C), since XX XXX 20XX, prior to this you were the managing director of Company A.

You have been required to hold positions on the management boards at associated companies of Company A.

Company A has an agreement with you that you will receive a minimum level of remuneration (target fee) per calendar year, for your consulting activities to Company A. The target fee should be achieved through any remuneration received by you in cash from associated companies for your board activities.

Any cash remuneration that you may receive from associated companies, for your board activities, counts towards the target fee. If this cash remuneration from associated companies exceeds the target fee, you are entitled to keep the excess, however if the amount is below the target fee, Company A will pay you the difference for the consultant activities.

The equity settled remuneration from associated companies for your board activities, was not explicitly considered as part of the initial agreement between Company A and yourself.

You were appointed to the Board of Company B, as a non-executive director, on XX XXX 20XX.

The term of appointment as a non-executive director is in accordance with the Company's Constitution.

You are expected to attend, either in person or by video or voice communication, regular board meetings; the annual general meeting; and a site visit, when appropriate.

Correspondence dated XX XXX 20XX, addressed to you, advised that at the recent General Meeting of shareholders you were awarded XXX options over shares in Company B.

Granting of Options

The Options are exercisable at $XXX and expire on XX XXX 20XX.

The Options Application Form provided:

In accepting the Options, the person above acknowledged and agrees:

•                     to be entered on the register of Option holders of the Company as the holder of the Option applied for, and any Shares issued on the exercise of the Option;

•                     to be bound by, and observe all provisions of, the terms of the Constitution

•                     that any tax liability arising from the Company accepting your application for Options or the issue of Shares on exercise of the Options is your responsibility and not that of the company;

•                     that once issued to the Company, this Application Form is irrevocable.'

Annexure A - Terms and Conditions of Options:

•                     No monies will be payable for the issue of the Options.

•                     The options expire at XX.00pm on XX XXX 20XX. If the options are not exercised, they will automatically lapse should the holder resign from the directorship, for whatever reason, with the Company unless the Board determines otherwise.

•                     Subject to conditions, each Option shall carry the right in favour of the option holder to subscribe for one fully paid ordinary share in the capital of the Company.

•                     Options shall be exercisable by the delivery to the registered office on the Company of a notice in writing stating the intention of the option holder to:

­        Exercise all or a specified number of Options; and

­        Utilise the Cashless Exercise Facility or pay the Exercise Price in full for the exercise of each Option.

An exercise of only some Options shall not affect the rights of the option holder to the balance of the options held.

•                     The Company shall allot the resultant shares within five business days of the exercise of the Option.

•                     Subject to the requirements of the Corporations Act 2001 (Cth), the Options shall be transferrable only to related parties but will not be listed on the Australian Securities Exchange (ASX).

•                     The company shall apply for official quotation on the ASX of the shares allotted pursuant to the exercise of any of the Options.

•                     Subject to the Shares of the Company being quoted on the ASX and clause 15(c), if a Participant wishes to exercise some or all of this Options it may elect by notice in such form and manner as the Board may prescribe to pay the Exercise Price by using the cashless exercise facility provided for under this clause (Cashless Exercise Facility).

•                     The Cashless Exercise Facility entitles a Participant to set-off the Exercise Price against the number of Shares which the Participant is entitled to receive on the exercise of the Participant's Options. By using the Cashless Exercise Facility, the Participant will receive the Shares to the value of the surplus after the Exercise Price has been set-off.

•                     If the Participant elects to use the Cashless Exercise Facility, the Participant will (instead of paying the Exercise Price) only be issued that number of Shares (rounded down to the nearest whole number) calculated in accordance with a formula.

The options had a market value of $XXX at the time the Option was granted.

The value of the shares was $XXX when the option was exercised on XX XXX 20XX. You exercised the cashless option (based on the exercise price of $XXX), and received XXX shares. The shares were held until Company B were 100% acquired by another company.

Your authorised representative advised that you were initially granted 100% of the options, but under a private agreement with Company A you would be beneficially entitled to retain the profits from XX% of the Options. According to the agreement you are required to agree with Company A on any actions to be taken with respect to the options.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 318(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 subsection 83A10(1)

Income Tax Assessment Act 1997 subsection 83A-10(2)

Income Tax Assessment Act 1997 section 83A-305

Income Tax Assessment Act 1997 paragraph 83A-305(1)(a)

Income Tax Assessment Act 1997 subsection 83A-305(1)

Income Tax Assessment Act 1997 section 83A-325

Reasons for decision

An employee share scheme (ESS) interest in a company is defined by subsection 83A-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to include a beneficial interest in a right to acquire a beneficial interest in a share in the company.

The XXX options that were granted to you to provide you with the right to exercise the options and acquire ordinary shares in Company B. The XXX options are ESS interests in Company B.

An ESS is defined by subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees of the company (or a subsidiary of the company) in relation to the employee's employment. It is also an employee share scheme if the ESS interest are provided to associates of the employee in relation to the employee's employment.

ESS interest acquired by an associate

XX% of the Options acquired by you were beneficially owned by Company A. That means you held them as trustee of a trust with Company A as sole beneficiary. This trust is a different 'entity' to you.

The effect on the application of Division 83A of the ITAA 1997 due to the provision of ESS interests to the associate of an employee rather than to the employee is explained by section 83A-305 of the ITAA 1997. Paragraph 83A-305(1)(a) treats the ESS interest as having been acquired by the employee instead of the associate.

The following rules apply to an ESS interest acquired by an associate in relation to the taxpayer's employment under subsection 83A-305(1):

•                     treat the ESS interest as having been acquired by the taxpayer, instead of the associate

•                     treat any circumstance, right or obligation existing or not existing in relation to the ESS interest in the hands of the associate, as existing or not existing in the hands of the taxpayer - this includes matters such as voting rights, restrictions on disposal, real risks of forfeiture and the cost base of the ESS interest, and

•                     treat anything done or not done by (or to) the associate in relation to the ESS interest as being done by (or to) the taxpayer - this includes actions such as disposal of the ESS interest by the associate, or takeover of the company in which the associate holds the ESS interest.

Who are associates

Associates of an individual is defined in subsection 318(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to mean:

•                     relatives of the individual

•                     a partner of the individual, or a partnership in which the individual is a partner

•                     if the partner is also an individual, the spouse and children of that partner, unless the partner is acting in the capacity of a trustee

•                     a trustee of a trust under which there is a benefit to the individual, or to a company, partnership, trustee or other person who is classed as an associate of the individual under any of the other rules in subsection 318(1)

•                     a company which is sufficiently influenced by:

­        the individual;

­        a company, partnership, trustee or other person classed as an associate of the individual under any of the other rules in subsection 318(1);

­        a company which is itself classed as an associate of the individual by reason of the application of this sufficient influence rule; or

­        two or more of the above entities.

Prior to commencing your role as an independent consultant to Company A you were the managing director of this company. Company A engaged your services as an independent consultant to hold positions on management boards, supervisory boards, boards of directors and similar offices, for Company A associated companies.

The trust mentioned above is your associate due to the link between Company A and you.

Employment-like activities

The reference to employment mentioned above is extended by section 83A-325 of the ITAA 1997 to include certain 'employment-like' activities of individuals that are work and income support withholding payments (otherwise than as an employee) which includes being a director of a company.

That means that an individual who acts as director of a company under a contract or an agreement and who is partly or fully rewarded for those services with shares, stapled securities or rights to acquire them from that company, is assessable on the value of those benefits as ESS interests granted to them under an employee share scheme.

The only instance where the grant of ESS interests in situations similar to this might not be subject the employee share scheme provisions is where a contract for the provision of services to the company is held by a non-individual and the ESS interests are allocated to that entity under the contract. (See Example 6 on page QC 23916 of our website.)

These statements apply to you in the following manner:

•                     The stock options are ESS interests in Company B because they provide you with the right to acquire shares in them.

•                     The grant of the stock options is under an ESS because they are a form of remuneration that you are receiving in return for acting as director of Company B.

•                     It does not matter that you have an agreement to pass the benefit onto other entities associated with you. It is sufficient that you are providing services as director to Company B as an individual.

Your role as a non-executive director, of Company B, is an employment-like activity under section 83A-325. The XXX Options were part of the reward given to you by Company B for your employment as a non-executive director.

Application to your circumstances

You were previously a managing director of Company A, and then became an independent consultant to this company. Company A have engaged your services to hold positions on the management boards of their associated companies. You receive a target fee from Company A and if the remuneration from associated entities exceeded the target fee, you were entitled to keep the excess.

It is considered that the ESS options acquired by you, as a reward for your services, were as an employee of Company B. You entered into a private agreement to assign XX% of the options to Company A (an associate) retaining XX% of the options. You advised that for all external purposes you were to act as the fully authorised holder of the options, with Company A remaining as the beneficial owner of XX%. According to section 83A-305 the interest assigned to Company A, in relation to your employment, is treated as if the ESS interest had been acquired by you and not Company A.

The engagement as a non-executive director of Company B is an employment-like activity, as explained above. At the general meeting of Company B the shareholders approved to award you with XXX options over shares in the company. This offer was made to you, as an employee, for the services you provided to the company as a non-executive director. You opted to exercise the cashless exercise facility on XX XXX 20XX and received XXX shares.

Consequently, the XXX options were granted to you as remuneration for your efforts as a non-executive director of Company B. Therefore you will be assessed on the entire grant.

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