Edited version of private ruling

Authorisation Number: 1011678762941

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Ruling

Subject: Employee share scheme - Options to acquire shares in a private company

Question 1: Will you be subject to tax on the grant of the options under the plan at the grant date?

Answer: Yes.

Question 2: Will you be entitled to a refund of tax paid at the grant date on the options that lapse?

Answer: No.

This ruling applies for the following periods:

2010-11 income year

2011-12 income year

2012-13 income year

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.

You are an Australian resident who is employed in Australia by a private company.

You do not carry on a business of share trading, and you are not acquiring options or shares as part of such a business.

Your principal source of income is as an employee of the company.

You will be granted options under the plan and, subject to certain specified exceptions, will not forfeit them if you cease employment. The options will only lapse if they are not exercised or surrendered by the exercise/surrender deadline.

The only circumstance in which you could forfeit your options is if your employment is terminated on a summary basis because you have engaged in fraud or illegal activity.

The plan

Under the plan, certain employees will receive part of their remuneration in the form of options and part in the form of cash. Though the future value of the options is uncertain, the number of options would generally not exceed 20% of an employee's total remuneration package if valued for a two year horizon with annual growth.

Each option shall entitle the Holder to acquire one share of common stock.

Options granted under the plan shall be acquired for no consideration.

Options shall be capable of exercise or surrender on the exercise/surrender date. The employee must notify the company whether they wish to exercise or surrender the option by this date.

If an employee chooses to exercise an option, their future remuneration will be reduced in two ways as a result. Firstly, the value of future remuneration will be reduced by the annual increase in actual book value of the acquired shares. Secondly, the value of future remuneration is reduced to reflect the fact that the company will not receive a corporate tax deduction for the annual increase in actual book value in respect of the acquired shares. This reduction is calculated as a set percentage of the gross remuneration.

Shares, including acquired shares, are not listed. The company can choose to buy back the acquired shares at any time for their actual book value.

The company typically retains sufficient earnings each year to ensure that actual book value increases each year, although there is no guarantee that actual book value will increase in any particular year. The company does not guarantee the payment of any component of any structural remuneration or additional remuneration to any employee.

Once the exercise/surrender date has been reached, the employee may, instead of exercising an option, elect to surrender the option for a cash payment. The cash payment will be equal to the number of options so surrendered multiplied by the difference between:

· the actual book value on the exercise/surrender date of one share, and

· the exercise price.

If an option is not exercised or surrendered by its exercise/surrender deadline, it lapses.

If an option lapses due to circumstances beyond the employee's control (for example, they are incapacitated and unable to provide written notice by the exercise/surrender deadline), the company, in its sole discretion, may make a cash payment to the employee equal to the amount of the option surrender proceeds that would have been delivered to the employee if the option had not lapsed but had been surrendered on the exercise/surrender date. The cash payment will be equal to the number of options so lapsed multiplied by the difference between:

· the actual book value of one share as of the exercise/surrender date, and

· the exercise price.

If the employee ceases employment with the company prior to the exercise/surrender date, options must be surrendered on the termination date and the company shall make a surrender payment to the employee in cash. If the holder fails to surrender by the termination date then it shall be deemed to have been surrendered as on the termination date. The surrender payment per option will be equal to the actual book value as at the termination date less the exercise price.

If the employee's employment with the company is terminated on a summary basis because the employee has engaged in fraud or illegal activity, then all options shall be immediately forfeited by the employee effective from the termination date with no compensation or payment due or payable from the company.

If the employee dies, options are deemed to have been automatically surrendered and a cash surrender payment will be made to the employee's estate.

If an offer event occurs, the company shall repurchase the acquired shares at the actual book value per share.

Options granted under the plan and acquired shares may not be transferred, assigned or encumbered except as otherwise expressly provided in the plan and the incorporation document.

All transactions in options and acquired shares under the plan shall be subject to the terms and provisions of the incorporation document.

The Incorporation document

The incorporation document and certain other documents were provided. They are to be read with and form part of the description of the scheme for the purpose of the ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-5

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-25

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-105

Income Tax Assessment Act 1997 Section 83A-310

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

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

Summary

You will be subject to tax on the grant of the options under the plan at the grant date.

Detailed reasoning

Subdivision 83A-B or Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to the options granted to you by your employer if:

· the options are ESS interests

· the options are granted under an employee share scheme, and

· the options are granted at a discount.

Subsection 83A-10(1) of the ITAA 1997 defines an ESS interest in a company as a beneficial interest in:

· a share in a company, or

· a right to acquire a beneficial interest in a share in a company.

The options are ESS interests because they give you the right to acquire shares in the company.

Subsection 83A-10(2) of the ITAA 1997 defines an employee share scheme as including a scheme under which ESS interests in a company are provided to employees of the company. The options are granted to you under an employee share scheme because they provide you with the right to acquire shares in the company, which is your employer.

Subsection 83A-20(1) of the ITAA 1997 states that Subdivision 83A-B of the ITAA 1997 only applies if the ESS interest is acquired by you at a discount. Paragraph 83A-105(1)(a) of the ITAA 1997 includes a similar requirement before Subdivision 83A-C of the ITAA 1997 can apply.

The options will be granted to you for no consideration, therefore, they will be granted at a discount as their market value is greater than $nil. Consequently, the Options will be granted at a discount. So, either Subdivision 83A-B or Subdivision 83A-C of the ITAA 1997 will apply to them.

Determining which of Subdivision 83A-B or Subdivision 83A-C apply

Subdivision 83A-B of the ITAA 1997 will apply and the discount will be assessable at grant unless Subdivision 83A-C of the ITAA 1997 applies to the Options.

The tests for determining whether Subdivision 83A-C of the ITAA 1997 will apply to the options are:

· that Subdivision 83A-B of the ITAA 1997 would otherwise apply to them

· that the options entitle you to acquire shares in your employer, or their holding company

· that the options entitle you to acquire ordinary shares in the company

· that the company is not share trading or investment company

· that you do not have significant ownership interests in the company

· there is a real risk of forfeiture over the options or over the shares acquired by exercising the options

Paragraph 83A-105(1)(a) of the ITAA 1997 requires Subdivision 83A-B of the ITAA 1997 to otherwise apply and refers to section 83A-20 of the ITAA 1997. Subsection 83A-20(1) of the ITAA 1997 states that Subdivision 83A-B of the ITAA 1997 only applies to ESS interests that are granted at a discount.

As stated above, we have concluded that the options will be granted to you at a discount because they will be granted to you for no consideration and their market value will be greater than $nil.

Paragraph 83A-105(1)(b) of the ITAA 1997 requires that subsections 83A-35(3), (4), (5) and (9) of the ITAA 1997 apply to the options.

Subsection 83A-35(3) of the ITAA 1997 will apply to the Options if they are an ESS interest in your employer or a holding company of your employer.

The Options are ESS interests for the reasons provided above and provide you with the right to acquire shares in the company which is your employer. Therefore, subsection 83A-35(3) of the ITAA 1997 will apply to the Options.

Subsection 83A-35(4) of the ITAA 1997 will apply to the options if they relate to ordinary shares.

The options will provide you with the right to acquire ordinary shares in the company. Therefore, subsection 83A-35(4) of the ITAA 1997 will apply to the options.

Subsection 83A-35(5) of the ITAA 1997 will apply to the options unless:

· the predominant business of the company is the acquisition, sale or holding of shares, securities or other investments

· you are employed by the company, and

· you are also employed by a related company or companies.

The exclusions do not apply to you, so subsection 83A-35(5) of the ITAA 1997 applies to the options.

Subsection 83A-35(9) of the ITAA 1997 will apply to the options if, immediately after you acquire them, you neither hold a beneficial interest in more than 5% of the shares of the company, nor are you in a position to cast, or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

We accept that you do not breach either of these conditions therefore, subsection 83A-35(9) of the ITAA 1997 will apply to the options.

The requirements of paragraph 83A-105(1)(b) of the ITAA 1997 are met because subsections 83A-35(3), (4), (5) and (9) of the ITAA 1997 will all apply to the Options.

Paragraph 83A-105(1)(d) of the ITAA 1997 requires that subsection 83A-105(3) of the ITAA 1997 applies to the options.

Subsection 83A-105(3) of the ITAA 1997 will apply to the options if there is a real risk of forfeiture of either the options themselves or of the shares acquired by exercising the options.

The rules of the plan provide very limited instances where you will lose the entitlement to exercise the options and acquire these shares. All of those instances are related to acts or omissions that are within your control. As such, there is not a real risk that you will forfeit the options that will be granted to you.

As there is not a real risk of forfeiture of the options, subsection 83A-105(3) of the ITAA 1997 does not apply to the options and neither does Subdivision 83A-C of the ITAA 1997.

Consequently, Subdivision 83A-B of the ITAA 1997 will apply to the options and the discount that you receive due to the grant of them will be included in your assessable income by subsection 83A-25(1) of the ITAA 1997 in the year that they are granted to you.

Question 2

Summary

You will not be entitled to a refund of tax paid at the grant date if your options lapse.

Detailed reasoning

Section 83A-310 of the ITAA 1997 removes your liability to tax under Division 83A of the ITAA 1997 in respect of the options where:

· an amount would otherwise be included in your assessable income by Division 83A of the ITAA 1997

· you forfeit the options (or shares acquired by exercising the options), and

· the forfeiture is not the result of a choice made by you (other than a choice to cease employment), or a condition of the scheme that protect you from a fall in the market value of the options.

We consider the presented evidence when determining whether or not the forfeiture or loss of the ESS interest is caused by a choice you made, or whether there are extenuating circumstances. Thus, performance hurdles not being met or being made redundant are not matters within your control.

For the purpose of this ruling, some of the options will lapse. There is no extenuating cause provided as a reason for you not being able to exercise the options before the expiry date.

Allowing your options to lapse is considered to be a choice that you make. Therefore, the third condition is not met and so section 83A-310 of the ITAA 1997 does not apply to prevent Division 83A from applying to the options that lapse.

Note: This outcome may need to be re-considered if the options lapse in a manner that authorises the company to make a cash payment to you given that a requirement for the making of the cash payment is that the options must lapse due to circumstances beyond your control.