Edited version of your private ruling

Authorisation Number: 1012459849711

Ruling

Subject: Employee Share Scheme (ESS) - qualifying rights - assessable discount

Question 1

Will the Commissioner exercise the discretion contained in subsection 139CD(8) of the Income Tax Assessment Act 1936 (ITAA 1936) to treat the options (ESS interests) as meeting the fourth condition (the 75% test) mentioned in subsection 139CD(5) of the ITAA 1936?

Answer

No.

Question 2

Is the assessable discount due to the sale of your Parcel 1 ESS interests the amount provided by you?

Answer

Yes.

Question 3

Is the assessable discount due to the sale of your Parcel 2 ESS interests the amount provided by you?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

Prior to 1 July 2009

Relevant facts and circumstances

You were granted two parcels of options to buy Company A common stock under an ESS:

According to your ESS agreement these ESS interests could not be exercised until after a number of years from grant date and were subject to performance and forfeiture conditions.

Your ESS interests were not offered to 75% of resident employees of Company A.

Your ESS interests vested and were exercised and sold on the above dates.

You did not pay any consideration for your ESS interests.

You did not make an election for either parcel of ESS interests.

The following documents are to be read with and form part of the description of the scheme for the purpose of this ruling:

· your private ruling application

· bank contract notes

· Company A Share Option Scheme letters.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 139B(1)

Income Tax Assessment Act 1936 Subsection 139C(1)

Income Tax Assessment Act 1936 Subsection 139CB(1)

Income Tax Assessment Act 1936 Subsection 139CD(1)

Income Tax Assessment Act 1936 Subsection 139CD(5)

Income Tax Assessment Act 1936 Subsection 139CD(8)

Income Tax Assessment Act 1997 Subsection 83A-110(1)

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

Reasons for decision

Question 1

Your ESS interests were acquired under an ESS as they were received directly in relation to your employment and issued to you at a discount. Section 139CD of the ITAA 1936 provides the meaning of qualifying shares and qualifying rights in regard to ESS interests. A share in a company will be a qualifying share if it satisfies the following requirements:

· the share is acquired by you from an employee share scheme;

· the company is your employer or your employer's holding company;

· the shares or rights to shares available from the employee share scheme are ordinary shares or rights to ordinary shares;

· after acquisition of the share, you do not hold a legal or beneficial interest of more than 5% of the shares in the company;

· after acquiring the share, you are not in a position to cast, or control the casting of, more than 5% of the votes at the company's general meeting; and

· when you acquired the share, at least 75% of the permanent employees of your employer were, or at some earlier time had been, entitled to acquire shares or rights to shares from an employee share scheme of your employer or its holding company (the 75% test).

A qualifying right must satisfy the same requirements, except the last requirement above, the 75% test.

Therefore, as your ESS interests are rights the Commissioner will not exercise the discretion as it relates to the 75% test which only applies to qualifying shares.

Question 2

Your Parcel 1 ESS interests are transitioned interests given that:

· they are qualifying interests under the old rules;

· you have not elected to be taxed upfront under the rules; and

· a cessation time has not happened to the rights before 1 July 2009 under the old rules.

The transitional provisions prescribe that the new rules in Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) apply to these interests. The discount amount on your ESS interests will not be included in your assessable income until the income year in which the deferred taxing point occurs.

Paragraph 83A-5(4)(b) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) ensures that the ESS deferred taxing point is determined using the cessation time. The deferred taxing point is the time when your Parcel 1 ESS interests were exercised and sold.

Subsection 83A-110(1) of the ITAA 1997 provides that your assessable income for the year that the deferred taxing point occurs includes the market value (calculated at the deferred taxing point) of the ESS interests, reduced by their cost base. In your case, the assessable amount equals your disposal proceeds, less the exercise price and any other costs associated with the disposal.

Your assessable income is required to be converted to Australian dollars. We accept that for the purposes of ascertaining the market value of the ESS interests, exchange rate data from the bank contract note could be used. Note that if there were any fluctuations in the exchange rate between the rate prescribed on the contract note and the rate at the time the proceeds were received, the difference would be a foreign currency gain or loss.

Therefore, the amount provided by you, being the assessable discount on your Parcel 1 ESS interests needs to be included in your assessable income for the relevant income year.

Question 3

Your Parcel 2 ESS interests receive the same tax treatment as Parcel 1. The deferred taxing point is the time when your Parcel 2 ESS interests were exercised and sold. The assessable discount is calculated using the same methodology as Parcel 1 and is converted to Australian dollars.

Therefore, the amount provided by you, being the assessable discount on your Parcel 2 ESS interests needs to be included in your assessable income for the relevant income year.