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Subject: Employee share scheme - options - lapsing - forfeiture

Question 1: Will you be able to amend your assessment to exclude an amount of discount arising due to the granting of employee shares scheme options prior to 1 July 2009 when the options have lapsed under section 139DD of the Income Tax Assessment Act 1936?

Answer: Yes.

Question 2: Will you be able to amend your assessment to exclude an amount of discount arising due to the granting of employee share scheme options after 1 July 2009 if you make the choice to forfeit the options under section 83A-310 of the Income Tax Assessment Act 1997?

Answer: No.

Questions 3: Will you be able to amend your assessment to exclude an amount of discount arising due to the granting of employee share scheme options after 1 July 2009 if you have no choice but to forfeit the options under section 83A-310 of the Income Tax Assessment Act 1997?

Answer: Yes.

This ruling applies for the following period

Income year ended 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts and circumstances

While you were an employee of Company A, you participated in an employee share scheme (ESS) offered by the company.

You were awarded a number of options under the ESS during income year A, income year B and income year C.

You did not make an election in relation to your options.

You did not pay any consideration to acquire the options.

You ceased employment with Company A after you had been granted the options.

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

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 139B

Income Tax Assessment Act 1936 Section 139CB

Income Tax Assessment Act 1936 Section 139DD

Income Tax Assessment Act 1936 Section 139E

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Section 83A-35

Income Tax Assessment Act 1997 Section 83A-120

Income Tax Assessment Act 1997 Section 83A-310

Income Tax (Transitional Provisions) Act 1997 Subdivision 83 A-B

Income Tax (Transitional Provisions) Act 1997 Section 83A-10

Reasons for decision

New Employee Share Scheme Provisions

Division 83A of the Income Tax Assessment Act 1997 deals with the taxation of discounts on shares, options and stapled securities acquired under employee share schemes (ESS). The Division was inserted by Act No 133 of 2009 and replaced the previous ESS regimes in the former Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936) which applied to the acquisition of a share, or a option to acquire a share, under an ESS during the period from 28 March 1995 to 30 June 2009, and the former section 26AAC of the ITAA 1936.

Detailed provisions in the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) extend the application of Div 83A to ESS scheme interests acquired before 1 July 2009, on which tax was deferred beyond 1 July 2009 under the previous regimes, but certain parts of the tax policy from the previous regimes are preserved by the ITTPA 1997.

Subdivision 83A-B of the ITTPA 1997 provides guidance on the application of the former ESS provisions of Division 13A of the ITAA 1936. Section 83A-10 of the ITTPA 1997 provides that this section will apply when Division 13A of the ITAA 1936 applied to options prior to it being repealed. In those cases, to avoid doubt, section 83A-10 of the ITTPA 1997 outlines that the former Division 13A will continue to apply, in spite of its repeal, to the share or right.

In your case, you were granted options both prior to and after 1 July 2009. Those options granted prior to 1 July 2009 will be assessed under Division 13A of the ITAA 1936 in accordance with application of the TTPA provisions. The options granted after 1 July 2009 will be assessed under Division 83A of the ITAA 1997.

Division 13A of the ITAA 1936

Under Division 13A of the Income Tax Assessment Act 1936 (ITAA 1936), you acquire options under an ESS when they are acquired in respect of your employment and the consideration paid for their acquisition is less than the market value of the shares or options at the time you acquired them.

Division 13A of the ITAA provides that cessation will occur in relation to qualifying options at the earliest of:

Disposal of the option, other than by exercising it;

Cessation of employment in respect of which the option was acquired;

Time when disposal restrictions or forfeiture conditions end, if option exercised;

Time when option is exercised if no disposal restrictions or forfeiture conditions; or

10 years after the options was acquired.

Section 139DD of the ITAA 1936 provides that an option in a company is taken to have never been acquired if a taxpayer loses the option without exercising it and they were an employee of the company at the time the right was granted.

Where these two conditions are met, any discount amount that had been assessed to the taxpayer in respect of the acquisition of the option will have been incorrectly assessed and is refundable. There are no time limits that restrict a taxpayer from requesting an amendment to their assessment in these circumstances.

In your case, you were granted ESS options during income year A year while you were an employee of Company A. You did not make an election in relation to the options; therefore the discount arising in relation to these options must be included in the income year in which cessation time occurred.

In this situation, cessation time occurred when you ceased employment with Company A. Therefore, the discount arising due to the granting of these options should be included in the income year in which cessation time occurred.

You were advised in a letter from Company A that some of your options granted during income year A had lapsed. Therefore, under section 139DD of the ITAA 1936, you are taken to have never acquired those options as they have lapsed without being exercised. Therefore, any discount amount included in your income tax return in relation to the lapsed options is refundable.

Division 83A of the ITAA1997

As outlined above, Division 83A of the ITAA 1997 applies to ESS interests granted from 1 July 2009.

The main features of Division 83A of the ITAA 1997 provisions are as follows:

The default position is that a taxpayer who acquires an ESS interest under an ESS at a discount to market value is taxed on the discount at the time of acquisition, referred to as upfront taxation:

A tax concession of up to $1,000 (the upfront tax concession) is available for taxpayers who participate in schemes subject to upfront taxation, if the taxpayer has a taxable income (after adjustments) of $180,000 or less. A range of conditions must be satisfied by the taxpayer and the scheme for the upfront tax concession to apply:

Deferral of tax to a later income year is available for taxpayers who participate in schemes where the ESS interests are at "real risk of forfeiture", or where employees can acquire ESS interests at 100% discount by salary sacrificing a maximum of $5,000. The "real risk of forfeiture" test does not apply to salary sacrifice schemes. The shorthand term used for this principle is "deferred" taxation:

Where deferred taxation applies to options, the deferred taxing point is the earliest of:

Seven years after you acquired the option;

When you cease the employment in respect of which you acquired the option;

When there is no real risk of forfeiting the option and the scheme no longer genuinely restricts disposal of the option; or

When there is no real risk of forfeiting the option or underlying share, and the scheme no longer genuinely restricts exercise of the option or disposal of the resulting share.

Refunds of tax paid on ESS interests that are later forfeited are available where the taxpayer had no choice but to forfeit the ESS interests, or where the taxpayer made a choice to resign from employment;

Refunds are not available where the scheme is structured to protect employees from market risk, or where the forfeiture is intentional due to market conditions (for example, the taxpayer chooses not to exercise rights because the exercise price exceeds the prevailing share price).; and

Where the forfeiture occurs in the same year that the amount would otherwise be assessable, the taxpayer can simply exclude the amount from that year's income tax return.

The capital gains tax (CGT) "market value substitution rule" in section 112-20 of the ITAA1997 specifically does not apply to an ESS interest forfeited by a taxpayer. It follows that, if a refund is not allowable under section 83A-310 of the ITAA 1997, the taxpayer may be able to claim a capital loss equal to the cost base of the forfeited ESS interests.

In your case, you were granted ESS options by Company A during income year B and income year C, which will be assessed under the Division 83A of the ITAA 1997 provisions.

The discount arising in relation to these ESS options must be included in the income year in which the deferred taxing point occurred. In your case, the deferred taxing point occurred when you ceased employment with Company A, as this was the earliest event to occur in relation to these Company A options.

Under Division 83A of the ITAA 1997, the availability of refunds on forfeited shares and rights is not available where the forfeiture is due to a choice made by the taxpayer (except a choice to leave employment), or where the ESS is structured to protect participants from market risk.

You have not advised that you have received notification from Company A that these options have been forfeited. Therefore, while you have ceased employment with Company A, it cannot be viewed that these options have been forfeited due to you making the choice to leave your employment with Company A.

If you decide not to exercise your Company A options granted during income year B and income year C, and they are forfeited, you will not be eligible for a refund because you will have made the choice to allow the options to be forfeited and that decision was not in relation to your choice to leave employment with Company A. However, you will be able to claim a capital loss equal to the cost base of any lapsed options.

However, if you have no choice but to forfeit the options, any tax paid in relation to those forfeited options is refundable.