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Ruling

Subject: Options acquired under employee share scheme

Question and answer

Is company B considered to be a subsidiary of company A for the purpose of former section 139GCA of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You were an employee of a company (company A) and were granted a number of company options.

Some time later, you concluded your employment at company A and commenced work at another company (company B).

At the time you concluded your employment at company A, your options were considered to have ceased under Division 13A - paragraph 139CB(1)(b) of the ITAA 1936 on the basis of termination of your employment.

As a result, company A issued you with an employee share scheme statement - Employee summary for the relevant year. On this statement an amount of assessable income was included at label G - Discount on ESS interest acquired pre 1 July 2009 and 'cessation time' occurred during the financial year.

While you were employed by company A you were seconded to company B and, likewise, when you were employed by company B you were seconded to company A. You contend that this shows the close relationship that these companies have with each other.

At the time when your employment with company A ceased, X Company B directors were heavily connected with company A.

Company A held a significant portion of company B prior to your acquisition of the options.

You have been advised by the Group Tax Manager of company A that company B had been treated as an associate by company A and not a subsidiary.

You have supplied copies of the following documents, and these documents form part of the facts for this private ruling:

· Employee share scheme statement,

· An excerpt of company B annual report,

· Secondment Agreement between company B and company A (for secondment of you from company A to company B).

· Secondment Agreement between company B and company A (for secondment of you from company B to company A).

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 139CB(2),

Income Tax Assessment Act 1936 Section 139GC,

Income Tax Assessment Act 1936 Section 139GCA,

Corporations Act 2001 Section 46 and

Corporations Act 2001 Section 47.

Reasons for decision

Subsection 139CB(2) of the ITAA 1936 provides that, for the purposes of the cessation time of rights, a taxpayer only ceased the employment in respect of which the right was acquired when the taxpayer is no longer employed by any of the following:

(a) the employer of the taxpayer in that employment;

(b) a holding company of the employer

(c) a subsidiary of the employer or of a holding company of the employer.

Sections 139GC and 139GCA of the ITAA 1936 provides that the expressions 'holding company' and 'subsidiary' have the same meaning as in the Corporations Act 2001. It is therefore necessary to look to the Corporations Act 2001 to identify the meanings behind these terms.

In accordance with section 46 of the Corporations Act 2001, a body corporate is a subsidiary of another body corporate if, and only if:

(a) the other body:

(i) controls the composition of the first body's board; or

(ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or

(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(b) the first body is a subsidiary of a subsidiary of the other body.

Section 47 of the Corporations Act 2001 provides that without limiting by implication the circumstances in which the composition of a body corporate's board is taken to be controlled by another body corporate, the composition of the board is taken to be so controlled if the other body, by exercising a power exercisable (whether with or without the consent or concurrence of any other person) by it, can appoint or remove all, or the majority, of the directors of the first mentioned body, and, for the purposes of this Division, the other body is taken to have power to make such an appointment if:

(a) a person cannot be appointed as a director of the first mentioned body without the exercise by the other body of such a power in the person's favour; or

(b) a person's appointment as a director of the first mentioned body follows necessarily from the person being a director or other officer of the other body.

The issue as to whether or a body controls the composition of a first body's board has been considered in our Courts in Mount Edon Gold Mines (Aust) Ltd v Burmine Ltd & Anor (1994) 12 ACLC 185 and Bluebird Investments Pty Ltd & Ors v Graf & Ors (1994) 12 ACLC 724. These cases both determined that practical or de facto control, in the absence of any legally enforceable power, does not suffice to establish the relationship of holding company and subsidiary, pursuant to section 46(a)(i) of the Corporations Law, whatever other effect such measure of control might have.

The fact that some of the directors of one company are also directors of another company does not automatically indicate that one company controls the composition of the other company's board and would, at best, represent merely practical or de facto control.

In your situation, while it is accepted that company B and company A share some of their directors, as well as a close relationship, this is not sufficient to conclude that company B controls the composition of company A's board and is therefore a subsidiary.

Furthermore, the Group Tax Manager of company A had advised that company B was treated as an associate and without evidence to the contrary, we are unable to conclude that this advice was not correct.