Edited version of your private ruling

Authorisation Number: 1011943000890

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Ruling

Subject: Employee share scheme - Sale of shares - Deferred taxing point

Question 1: Can you use the Parcel B sale date as the deferred taxing point for the Parcel B shares?

Answer: No.

Question 2: Can you use the Parcel C sale date as the deferred taxing point for the Parcel C shares?

Answer: No.

This ruling applies for the following periods

2009-10 income year

2010-11 income year

2011-12 income year

The scheme commences on:

1 July 2004

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 worked at XYZ for a number of years. During this time, XYZ granted you several parcels of restricted XYZ shares as part of its staff incentive scheme.

You received a letter from XYZ advising that certain shares were held in the XYZ Executive Share Ownership Plan as Restricted Shares at your termination date during the 2009-10 income year:/

You received an Annual Employee Share Scheme Tax Statement Summary from XYZ for the period from 1 July 2009 to 30 June 2010 advising that discounts on these shares had to be included in your assessable income for the 2009-10 income year.

You sold the Parcel A shares immediately. You wanted to sell the Parcel B shares and Parcel C shares on this date as well, however, XYZ held these two parcels in escrow and you weren't able to sell them at that time.

Nonetheless, you were taxed on the value of all parcels at the value prevailing when you left XYZ.

You sold your Parcel B shares as soon as possible after they vested at a significantly lower amount than they were worth when you left your employment with XYZ.

You sold your Parcel C shares as soon as possible after they vested at a significantly lower amount than you obtained for the Parcel B shares.

You consider your benefit from this incentive plan from your previous employer was quite small when you subtract the tax you paid on the Parcel B and Parcel C shares from the net proceeds you received from selling them.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-10,

Income Tax Assessment Act 1997 Section 83A-20,

Income Tax Assessment Act 1997 Section 83A-35,

Income Tax Assessment Act 1997 Section 83A-105,

Income Tax Assessment Act 1997 Section 83A-110,

Income Tax Assessment Act 1997 Section 83A-315,

Income Tax (Transitional Provisions) Act 1997 Section 83A-5,

Income Tax Assessment Act 1936 Section 139B,

Income Tax Assessment Act 1936 Section 139C,

Income Tax Assessment Act 1936 Section 139CA,

Income Tax Assessment Act 1936 Section 139CD and

Income Tax Assessment Act 1936 Section 139E.

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 cannot use the Parcel B sale date as the deferred taxing point for the Parcel B shares.

Detailed reasoning

The remuneration that you receive in your employment can take forms other than cash including the provision of shares or rights to acquire shares to you at a discount to their market value.

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) contains provisions that determine when an amount is to be included in your assessable income as the 'discount' you received and how much that discount is. This taxing point effectively represents the date on which the shares or rights cease being remuneration that you earn in your employment (for income tax purposes) and become a capital asset that you hold for investment purposes.

Division 83A of the ITAA 1997 applies to shares and rights to acquire shares that are granted after 1 July 2009 and also to shares and rights granted before 1 July 2009 that were subject to income tax deferral past this date.

Former Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) applied until 30 June 2010. Some of these former rules continue to apply past 30 June 2010 to shares and rights to acquire shares granted before 1 July 2009 (called transitioned shares and rights). One of these is the method of working out the deferred taxing point (called the cessation time by Division 13A of the ITAA 1936).

Former subsection 139CA(2) of the ITAA 1936 defined the cessation time of shares that had selling restrictions or forfeiture conditions to be the earliest of the following:

· When you dispose of the share

· The later of:

o When any selling restrictions end, and

o When any forfeiture conditions end

· When the employment in respect of which you acquired the share ends, and

· Ten years from the date of acquisition.

Subsection 83A-115(3) of the ITAA 1997 moves the deferred taxing point to the disposal date if you dispose of the share within 30 days of the cessation time worked out above.

The cessation time can occur while there are still selling restrictions on shares granted under an employee share scheme, however, this is unusual. Most employee share schemes that operate in Australia do not have selling restrictions that last for longer than ten years and most remove the selling restrictions once the employee leaves (or the employee forfeits the shares by leaving).

Neither division 83A of the ITAA 1997 nor Division 13A of the ITAA 1936 provide the Commissioner with any scope to substitute a different taxing point to that specified in the provisions mentioned above.

Your situation

Three potential cessation times have happened to your Parcel B shares. They are:

· The sale of your Parcel B shares

· The selling restrictions on your Parcel B shares ending, and

· Your employment ending

The earliest of these three was the ending of your employment, so it is your cessation time for the Parcel B shares.

You have received an Advice from your employer stating that the cessation time of the Parcel B shares happened due to your employment ending. Their conclusion is in accord with the above.

The amount to be included in your assessable income in relation to the Parcel B shares granted to you under the XYZ Executive Share Ownership Plan is their market value calculated at the date of termination of your employment unless you chose to include the discount in your assessable income in the year that they were granted to you.

Note: XYZ have completed the Annual employee share Scheme Tax Statement Summary - 1 July 2009 to 30 June 2010 as if you didn't make an election under section 139E of the ITAA 1936 for any of the grant years. Making this election would have subjected you to tax in the grant year instead of the year of the deferred taxing point.

Question 2

Summary

You cannot use the Parcel C sale date as the deferred taxing point for the Parcel C shares.

Detailed reasoning

The provisions listed above also apply to your Parcel C shares as they were also granted to you under an employee share scheme before 1 July 2009.

Three potential cessation times have happened to your Parcel C shares. They are:

· The sale of your Parcel C shares

· The selling restrictions on your Parcel B shares ending, and

· Your employment ending

The earliest of these three was the ending of your employment, so it is your cessation time for the Parcel C shares.

You have received an Advice from your employer stating that the cessation time of the Parcel C shares happened due to your employment ending. Their conclusion is in accord with the above.

The amount to be included in your assessable income in relation to the Parcel C shares granted to you under the XYZ Executive Share Ownership Plan is their market value calculated at the date of termination of your employment unless you chose to include the discount in your assessable income in the year that they were granted to you.