Edited version of private ruling

Authorisation Number: 1011698619565

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Subject: Employee share schemes - qualifying options - bonus shares - capital gains tax

Question 1

Will the discount for the employee options be included in the income year in which cessation occurs?

Answer

Yes.

Question 2

Will the capital gains tax provisions apply on the disposal of the shares acquired from the exercising of the employee options?

Answer

Yes.

Question 3

Will the bonus shares be covered by the Employee Share Scheme provisions?

Answer

No.

Question 4

Did you acquire the bonus shares on the date you exercised the employee options?

Answer

Yes.

Question 5

Will the cost base of each bonus share be calculated by apportioning the market value of the shares acquired from exercising the employee options?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You participated in the Broken Hill Proprietary Company Limited (BHP Limited) Employee Share Plan (ESP) and were granted a number of BHP qualifying options.

You did not pay any consideration to acquire the options.

You did not make an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936).

The exercising of the options was subject to the Company satisfying performance hurdles.

BHP Limited merged with Billiton PLC with a name change to BHP Billiton Billiton Limited (BHP Billiton). Under the terms of the merger, each eligible BHP Billiton ESP option holder would, upon exercise of the options, receive 1.0651 bonus shares for each BHP Limited share.

The BHP Steel Demerger and capital reduction on 5 July 2002 altered the exercise price of all options issued under the ESP. After 5 July 2002, the exercise price for all options was reduced by $1.43 per option. As at 5 July 2002, the exercise price was $14.29.

You exercised your BHP options, and paid $14.29 to exercise the options.

Upon exercising the options, you were granted BHP shares, plus a number of bonus shares.

On the day of exercising the options, you disposed of a number of your BHP employee shares to fund the exercise price.

No dividends were paid prior to the exercising of the options.

You have provided a number of documents which should be read in conjunction with, and forms part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-10

Income Tax Assessment Act 1997 Section 130-20

Income Tax Assessment Act 1997 Subsection 130-83(2)

Income Tax Assessment Act 1936 Subsection 139B(1)

Income Tax Assessment Act 1936 Subsection 139B(3)

Income Tax Assessment Act 1936 Subsection 139C(1)

Income Tax Assessment Act 1936 Subsection 139CB(1)

Income Tax Assessment Act 1936 Subsection 139CC(3)

Income Tax Assessment Act 1936 Subsection 139CC(4)

Income Tax Assessment Act 1936 Section 139E

Reasons for decision

Employee options

An employee acquires shares or options under an employee share scheme (ESAS) if they were acquired in respect of, or in relation directly or indirectly to, the employment of the employee, and were issued at a discount.

The employee can choose when they include the discount given on the qualifying shares or options in their assessable income. When an employee makes an election under section 139E of the Income Tax Assessment Act 1936 (ITAA 1936), the discount amount for the employee shares or options should be included in their assessable income in the income year in which they acquired the shares or options.

If an election under section 139E is not made in respect of qualifying options, the discount on the options is included in assessable income in the income year in which cessation time occurs.

In your case, you were granted BHP qualifying options. As you did not make an election under section 139E of the TAA 1936, the discount from your options will be included in your assessable income in the income year in which cessation occurs.

Cessation time

Cessation time for qualifying options is the earliest of the following:

· disposal of the option, other than by exercising it

· cessation in relation to employment in respect of which the option was acquired

· time when disposal restrictions or forfeiture conditions end, if option exercised

· if there was no disposal restrictions or forfeiture conditions on the shares acquired by exercising the option, when the option was exercised; or

· 10 years after option was acquired.

In this case, you exercised the BHP options in 2009. As this is the earliest event to occur in relation to your options, cessation time occurred on the date you exercised the options. Therefore, the discount for your BHP options must be included in your assessable income in the 2008-09 income year.

Discount for employee options

The calculation of the amount of discount is dependant in whether the shares acquired by exercising the options are disposed of at arms length within 30 days of cessation time.

When the shares acquired by exercising the option are disposed of by the taxpayer in an arm's length transaction within 30 days of cessation time, the discount is calculated using the following method:

Consideration received for the disposal of the shares

Less

Any consideration paid or given by the employee for their acquisition; and

Any consideration paid or given by the employee to exercise the options.

When the share acquired by exercising the option is not disposed of by the taxpayer in an arm's length transaction at the cessation time or within 30 days after cessation time, the discount is calculated using the following method:

The market value of the share acquired as a result of exercising the option at cessation time

Less

Any consideration paid or given by the taxpayer as consideration for the acquisition of the option; and

Any consideration paid or given by the taxpayer for the option to be exercised.

In your case, you exercised the BHP options in 2009 and were issued BHP shares. On the day of exercising the options, you disposed of a number of BHP shares to fund the exercise price

As you disposed of a number of BHP shares at cessation time, your discount for those shares is the consideration received for the sale less the amount paid to exercise the option to acquire the shares sold.

As you did not dispose of the remaining BHP shares within 30 days of cessation time occurring, the discount for the options exercised to obtain those shares should be calculated using the second method listed above.

Capital gain or capital loss made on the disposal of the BHP shares

A capital gain or capital loss may occur when a capital gains tax (CGT) event occurs to a CGT asset. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as on the disposal of shares.

If an arm's length CGT event A1 happens in relation to shares acquired by exercising options within 30 days of cessation time, the capital gain or capital loss made on the disposal of the shares is disregarded.

However, if the when the shares acquired as a result of exercising options are not disposed of within 30 days of cessation time, any capital gain or capital loss made on their disposal is not disregarded. The first element of the cost base, or reduced cost base, of the shares is their market value at cessation time.

Where a CGT event happens in relation to the shares, a capital gain or capital loss is calculated in accordance with the CGT rules applicable to that event. Where options are exercised, the shares are acquired on the date the options are exercised.

In your case, you disposed of a number of BHP shares acquired after exercising your options at cessation. Therefore, you disregard any capital gain or capital loss made on the disposal of those shares.

When you disposed of the remaining BHP shares, you cannot disregard the capital gain or capital loss made on their disposal. You will make a capital gain if the capital proceeds you receive for the disposal of the remaining BHP shares are greater than their cost base, their market value at cessation time. You will make a capital loss if the capital proceeds are less than the shares cost base.

Note: You acquired the remaining BHP shares on the date of cessation in 2009, and have now owned them for longer than 12 months. If you meet all of the other conditions, you will be able to apply the 50% CGT discount to any capital gain made on the disposal of the shares.

Bonus shares

Under the terms of the merger, each eligible BHP Billiton ESP option holder, upon exercising their options, would receive 1.0651 bonus shares for each BHP Limited share. In your case, upon exercising your BHP options you were issued BHP bonus shares.

The bonus shares were issued to all BHP shareholders, not just employees of the company. Therefore, you did not receive the bonus shares in respect of or in relation directly or indirectly to your employment.

The bonus shares are to be treated as normal bonus shares for CGT purposes. Your date of acquisition of the bonus shares was the date you exercised the options in 2009.

The amount of capital gain or capital loss made on the bonus shares will be calculated when the bonus shares are sold. You will make a capital gain if the capital proceeds for the disposal of the bonus shares are more than the cost base of the bonus shares. You will make a capital loss if the capital proceeds for the disposal of the bonus shares are less than the cost base of the bonus shares.

Cost base of the bonus shares

For CGT purposes, the cost base of the 5,326 bonus shares is calculated by apportioning the market value of the 5,000 BHP shares at cessation time, between the 5,000 BHP shares and the 5,326 bonus shares. The calculation for the cost base of the bonus shares is calculated as follows:

Market value of BHP shares at cessation

Total number of shares = Cost base per bonus share