Edited version of private ruling

Authorisation Number: 1011659910209

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Ruling

Subject: Share and Share Option Plan

Question 1

Will the acquisition of the options by the Employee under the Plan constitute an acquisition of a right to a share under an employee share scheme to which subsections 83A-105(1) and 83A-105(3) of the Income Tax Assessment Act 1997 (ITAA 1997) applies?

Answer

Yes

Question 2

If the acquisition of options by the Employee is not one to which Division 83A applies, will their acquisition constitute assessable income of the Employee under section 6-5, section 6-10 or section 15-2 of the ITAA 1997?

Answer

Not applicable

Question 3

Will the non-exercise period and performance hurdle attached to the options granted by the Employer to the Employee under the Plan, constitute a real risk of forfeiture for the purposes of subsection 83A-105(3) of the ITAA 1997?

Answer

Yes

Question 4

Will the options granted to the Employee under the Plan be subject to the ESS deferred taxing point provisions of Division 83A of the ITAA 1997?

Answer

Yes

Question 5

Will the taxable discount on the options granted to the Employee under the Plan be deferred until the occurrence of the ESS deferred taxing point under section 83A-120 of the ITAA 1997?

Answer

Yes

Question 6

Will the ESS deferred taxing point to arise upon the vesting of the options granted to the Employee under the Plan be determined under subsections 83A-120(4) to (7) of the ITAA 1997?

Answer

Yes

Question 7

Will the amount to be included in the Employee's assessable income for the income year in which the ESS deferred taxing point for his options occurs comprise the market value of those options reduced by their cost base?

Answer

Yes

Question 8

For the purposes of section 83A-110 of the ITAA 1997, will the market value of the options granted to the Employee be determined pursuant to section 83A-315 of the ITAA 1997 and regulations 83A-315.01 to 83A-315.09 of the Income Tax Assessment Regulations 1997 (ITAR 1997) at the ESS deferred taxing point for those options?

Answer

Yes

Question 9

Where the Employee acquires a share as a result of the exercise of an option, will the cost base of that share be determined under section 110-25 of Subdivision 110-A of the ITAA 1997?

Answer

Yes

Question 10

Will the occasion of an ESS deferred taxing point under subsection 83A-120(5) of the ITAA 1997 upon termination of the Employee's employment give rise to an employment termination payment to the Employee under section 82-130 of the ITAA 1997?

Answer

No

This ruling applies for the following periods:

Income Tax Year ended 30 June 2011

Income Tax Year ended 30 June 2012

Income Tax Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Employer intends to implement an employee share plan which is designed to reward employees for their service and to encourage them to remain with the Employer by providing them with an opportunity to acquire beneficial ownership of rights to acquire a beneficial interest in shares and annually access the deferred taxation concession available under section 83A-105 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 15-2

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Subsection 82-130(1)

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Paragraph 82-135(m)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subsection 83A-20(1)

Income Tax Assessment Act 1997 Subsection 83A-35(3)

Income Tax Assessment Act 1997 Subsection 83A-35(4)

Income Tax Assessment Act 1997 Subsection 83A-35(5)

Income Tax Assessment Act 1997 Subsection 83A-35(9)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Subsection 83A-105(1)

Income Tax Assessment Act 1997 Subsection 83A-105(3)

Income Tax Assessment Act 1997 Paragraph 83A-105(3)(b)

Income Tax Assessment Act 1997 Section 83A-110

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Subsection 83A-120(3)

Income Tax Assessment Act 1997 Subsection 83A-120(4)

Income Tax Assessment Act 1997 Subsection 83A-120(5)

Income Tax Assessment Act 1997 Subsection 83A-120(6)

Income Tax Assessment Act 1997 Subsection 83A-120(7)

Income Tax Assessment Act 1997 Section 83A-315

Income Tax Assessment Act 1997 Subdivision 110-A

Income Tax Assessment Act 1997 Section 110-25

Income Tax Regulations Act 1997 Regulation 83A-315.01

Income Tax Regulations Act 1997 Regulation 83A-315.02

Income Tax Regulations Act 1997 Regulation 83A-315.03

Income Tax Regulations Act 1997 Regulation 83A-315.04

Income Tax Regulations Act 1997 Regulation 83A-315.05

Income Tax Regulations Act 1997 Regulation 83A-315.06

Income Tax Regulations Act 1997 Regulation 83A-315.07

Income Tax Regulations Act 1997 Regulation 83A-315.08

Income Tax Regulations Act 1997 Regulation 83A-315.09

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Employee.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Will the acquisition of the options by the Employee under the Plan constitute an acquisition of a right to a share under an employee share scheme to which subsections 83A-105(1) and 83A-105(3) of the ITAA 1997 applies?

Yes.

Pursuant to section 83A-105 of the ITAA 1997, Subdivision 83A-C of the ITAA 1997 applies to an ESS interest that is a beneficial interest in a right to acquire a beneficial interest in a share in a company if:

Subdivision 83A-B of the ITAA 1997 would, apart from section 83A-105 of the ITAA 1997, apply to the interest; and

· subsections 83A-35(3),(4),(5) and (9) of the ITAA 1997 apply to the interest; and

· subsection 83A-105(3) of the ITAA 1997 applies to the interest.

Subdivision 83A-B of the ITAA 1997 would, but for the application of Subdivision 83A-C of the ITAA 1997, apply to ESS interests acquired under an employee share scheme at a discount (subsection 83A-20(1) of the ITAA 1997).

The options are acquired under the Plan by the Employee at a discount (i.e. for no consideration) for the purposes of Subdivision 83A-B of the ITAA 1997.

At the time the Employee will acquire the ESS interest under the Plan, all the ESS interests available for acquisition under the Plan will relate to ordinary shares in the Employer which is his current employer, thereby satisfying subsections 83A-35(3) and 83A-35(4) of the ITAA 1997.

The predominant business of the Employer is not the acquisition, sale or holding of shares, securities or other investments, thereby satisfying subsection 83A-35(5) of the ITAA 1997.

Immediately after the Employee will acquire the ESS interests, he will not hold a beneficial interest in more than 5% of the shares in the Employer or be in a position to cast or control the casting of more than 5% of the maximum number of votes that may be cast at a general meeting of the Employer, thereby satisfying subsection 83A-35(9) of the ITAA 1997.

Subsection 83A-105(3) of the ITAA 1997 is also satisfied as, at the time the ESS interest is acquired by the Employee under the Plan, there is a real risk that, under the conditions of the Plan, he will forfeit or lose the ESS interest other than by disposing of it, exercising it or letting it lapse.

As the Employee will acquire ESS interests under the Plan:

· that are beneficial interests in rights to acquire beneficial interests in shares in a company at a discount;

· in which subsections (3), (4), (5) and (9) of section 83A-35 of the ITAA 1997 apply; and

· in which subsection 83A-105(3) of the ITAA 1997 applies,

· they will constitute ESS interests referred to in section 83A-105 of the ITAA 1997.

Question 2

If the acquisition of options by the Employee is not one to which Division 83A applies, will their acquisition constitute assessable income of the Employee under section 6-5, section 6-10 or section 15-2 of the ITAA 1997?

Not applicable, as the options acquired by the Employee under the Plan described in this ruling are ESS interests in a company provided under an employee share scheme to which Subdivision 83A-C of the ITAA 1997 applies.

Question 3

Will the non-exercise period and performance hurdle attached to the options granted by the Employer to the Employee under the Plan constitute a real risk of forfeiture for the purposes of subsection 83A-105(3) of the ITAA 1997?

Yes.

Paragraph 83A-105(3)(b) of the ITAA 1997 applies to ESS interests acquired under an employee share scheme that are a beneficial interest in a right to acquire a beneficial interest in a share if, at the time the interest is acquired there is a real risk that under the conditions of the scheme:

· the ESS interest will be forfeited or lost other than by disposal, exercise or lapsing; or

· if the right is exercised, the beneficial interest in the share is forfeited or lost other than by disposal.

An ESS interest is at real risk of forfeiture if a reasonable person would consider that there is a real risk that the employee would lose or forfeit the interest or never receive it, other than by selling or exercising it, by intentionally taking no action to realise the benefit, or through the market value of the ESS interest falling to nil. 'Real' is regarded as something more than a mere possibility (paragraphs 1.42 and 1.156 of the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009).

The options granted under the Plan may not be exercised:

· within two years of receipt;

· if the price of the Employer shares on the day of exercise isn't at least 20% higher than the exercise price; and

· if the employment of the participant, or where the option is held by an option nominee the employment of the employee who nominated the option nominee, is terminated in circumstances other than as a result of injury, disability, retirement or death.

The options granted to the Employee are therefore not exercisable until at year 2 or some time thereafter the Employer share price is at least 20% higher than the exercise price.

This constitutes more than a mere possibility that the options granted by the Employer to the Employee under the Plan are subject to a real risk of forfeiture for the purposes of subsection 83A-105(3) of the ITAA 1997.

Question 4

Will the options granted to the Employee under the Plan be subject to the ESS deferred taxing point provisions of Division 83A of the ITAA 1997?

Yes.

The options to be granted to the Employee under the Plan will constitute ESS interests that are beneficial interests in rights to acquire beneficial interests in shares, and satisfy the requirements of section 83A-105 of the ITAA 1997.

Section 83A-120 of the ITAA 1997 determines the ESS deferred taxing point for such ESS interests.

Question 5

Will the taxable discount on the options granted to the Employee under the Plan be deferred until the occurrence of the ESS deferred taxing point under section 83A-120 of the ITAA 1997?

Yes.

Section 83A-120 of the ITAA 1997 determines the ESS deferred taxing point for ESS interests constituted by a beneficial interest in a right to acquire a beneficial interest in a share. Subject to subsection 83A-120(3) of the ITAA 1997, the ESS deferred taxing point for rights to acquire shares is the earliest of the following times:

· when the right is yet to be exercised; there is no real risk that the right will be forfeited or lost other than by its disposal, exercise or lapse; and there are no longer any genuine restrictions preventing disposal; or

· when the employment in respect of which the right is acquired ceases; or

· seven years after the right is acquired; or

· when there is no real risk that the right will be forfeited or lost other than by its disposal, exercise or lapse; there are no longer any genuine restrictions preventing exercise of the right; there is no real risk that if the right is exercised the share will be forfeited or lost other than by its disposal; and there are no longer any genuine restrictions preventing disposal of the share if you exercised the right.

The options to be granted to the Employee under the Plan will constitute ESS interests that are beneficial interests in rights to acquire beneficial interests in shares, satisfy the requirements of section 83A-105 of the ITAA 1997 and enable him to defer the payment of tax on his ESS interests until the ESS deferred taxing point for those interests arises, as determined under section 83A-120 of the ITAA 1997.

Question 6

Will the ESS deferred taxing point to arise upon the vesting of the options granted to the Employee under the Plan be determined under subsections 83A-120(4) to (7) of the ITAA 1997?

Yes.

Section 83A-120 of the ITAA 1997 determines the ESS deferred taxing point for ESS interests constituted by a beneficial interest in a right to acquire a beneficial interest in a share.

Subject to subsections 83A-120(3), 83A-120(5) and 83A-120(6) of the ITAA 1997, the ESS deferred taxing point to arise upon the vesting of any options granted to the Employee under the Plan is the earliest of the following times:

· when the right is yet to be exercised; there is no real risk that the right will be forfeited or lost other than by its disposal, exercise or lapse; and there are no longer any genuine restrictions preventing disposal (subsection 83A-120(4)); or

· when there is no real risk that the right will be forfeited or lost other than by its disposal, exercise or lapse; there are no longer any genuine restrictions preventing exercise of the right; there is no real risk that if the right is exercised the share will be forfeited or lost other than by its disposal; and there are no longer any genuine restrictions preventing disposal of the share if you exercised the right (subsection 83A-120(7)).

Question 7

Will the amount to be included in the Employee's assessable income for the income year in which the ESS deferred taxing point for his options occurs comprise the market value of those options reduced by their cost base?

Yes.

Section 83A-110 of the ITAA 1997 includes in an employee's assessable income for the income year in which the ESS deferred taxing point occurs the market value of the ESS interest at the ESS deferred taxing point, less the cost base of the ESS interest.

Question 8

For the purposes of section 83A-110 of the ITAA 1997, will the market value of the options granted to the Employee be determined pursuant to section 83A-315 of the ITAA 1997 and regulations 83A-315.01 to 83A-315.09 of the ITAR 1997 at the ESS deferred taxing point for those options?

Yes.

For subsection 83A-315 of the ITAA 1997, and subject to regulation 83A-105.01(2) of the ITAR 1997, the amount relating to an unlisted right that must be exercised within 10 years after the date of its acquisition is, at the choice of the right holder:

· the market value of the right in accordance with its ordinary meaning; or

· the amount determined by the application of regulations 83A-315.02 to 83A-315.09 of the ITAR 1997 (regulation 83A-315.01(1)).

The value of the options granted to the Employee will, pursuant to regulation 83A-315.02(1), be determined at the ESS deferred taxing point for those options as the greater of:

· the market value, on the day, of the share that may be acquired upon exercise of the option, less the exercise price of the option; and

· the value determined in accordance with regulations 83A-315.05 to 83A-315.09 of the ITAR 1997.

Question 9

Where the Employee acquires a share as a result of the exercise of an option, will the cost base of that share be determined under section 110-25 of Subdivision 110-A of the ITAA 1997?

Yes.

The cost base of a share acquired by the Employee under the Plan upon exercise of an option will be determined by reference to Subdivision 110-A of the ITAA 1997.

Question 10

Will the occasion of an ESS deferred taxing point under subsection 83A-120(5) of the ITAA 1997 upon termination of the Employee's employment give rise to an employment termination payment to the Employee under section 82-130 of the ITAA 1997?

No.

An employment termination payment is defined under subsection 82-130(1) of the ITAA 1997 to include a payment that is:

· received by you as a consequence of the termination of your employment;

· received by you within 12 months after that termination; and

· not a payment mentioned in section 82-135 of the ITAA 1997.

Paragraph 82-135(m) of the ITAA 1997 excludes amounts included as assessable income under Division 83A of the ITAA 1997 as employment termination payments.

Any amount included in the Employee's assessable income under section 83A-110 of the ITAA 1997 in an income year in which the ESS deferred taxing point occurs as a result of termination of his employment will therefore not constitute an employment termination payment under section 82-130 of the ITAA 1997.