Edited version of your private ruling

Authorisation Number: 1012442666186

Ruling

Subject: Employee Share Scheme

Question 1:

Is an amount included in your assessable income as a discount from an employee share scheme due to the buyback of options?

Answer:

Yes.

Question 2:

Is any capital gain or capital loss you made due to the buyback of the options disregarded?

Answer:

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced 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 employed by a company.

After 1 July 2009, you were granted options in the Company Executive Share Option Plan (ESOP).

These options were available to executives and managers who had completed six months continuous service and they were selected to participate by the Company's Board at its discretion.

The grant of options was divided into a number of equal tranches with specified vesting periods.

The exercise price was the market value of ordinary shares in the Company as at the grant date.

The options were only exercisable after a Liquidity Event, being an initial public offering of shares in the Company on the country's stock exchange or any other recognised stock exchange, a change of control event, or a Trade Sale of a minimum of X% of the business of the Company to a third party.

There was a buy-back of options condition which allowed the Board to buy-back your vested options at anytime. The Board may exercise this discretion where:

· a Liquidity Event does not occur by a specified anniversary of the Grant Date, or

· your employment ceases and you are a Good Leaver.

There was a possibility of your unvested options lapsing if you ceased employment during the vesting period.

The Buy-back Price will be at the market value of the shares as determined by the Valuation Methodology at that time.

Last year you were offered a specified amount in consideration for:

· the cancellation of the options, and

· the release of the Company from any and all claims you have, may have had or at future time may have in relation to the options or the ESOP.

You received the amount sum before the end of the financial year.

You have supplied a copy of the following documentation to support your application and this document is to be read with and forms part of your application for the purpose of this ruling:

· the Company - Executive Share Option Plan Rules

· the Company- Executive Share Option Plan - Invitation, and

· correspondence received.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 83A-20

Income Tax Assessment Act 1997 Section 83A-30

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-120

Income Tax Assessment Act 1997 Section 130-80

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.

Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the taxation of discounts on shares, options and stapled securities acquired under employee share schemes (ESS).

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 the Company during the 201X-1X income year, 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 the Company exercised its discretion under the Buy-back options clause in the ESOP and your options were cancelled. This was the earliest event to occur in relation to these options.

Therefore, you will need to include the amount you received in your relevant income tax return.

Capital gains tax (CGT)

As the ESS deferred taxing point happened at the time your options were forfeited (disposal) any capital gain or capital loss is disregarded.