Edited version of your private ruling

Authorisation Number: 1012469410157

Ruling

Subject: Employee Share Scheme; Right to Shares

Question 1

Does the interest in the Company granted to the Taxpayer constitute an award under an Employee Share Scheme (ESS) taxed under Division 83A of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

No.

Question 2

If the interest is an ESS interest, will it be subject to tax and in which financial year?

Answer

Not applicable.

Question 3

Does the Taxpayers' interest in the company constitute income under any other relevant tax provisions?

Answer

No.

This ruling applies for the following period

1 July 2010 to 30 June 2012

Relevant facts and circumstances

The Taxpayer was a director and then chairperson in the company and received an annual cash remuneration paid quarterly in arrears.

During a Board meeting a recommendation regarding the Taxpayer's remuneration as Chairperson was made. It provided for a percentage of shares in the company subject to several conditions being met. One condition in particular required the Taxpayer to conclude a specific business transaction in order to receive the shares.

At the time of discussion regarding the Recommendation the Taxpayer was shown a schedule of proposed shareholdings in an informal ad-hoc meeting between himself and another Company executive. The proposal included allocation of shares to the Taxpayer in a restructure of shareholdings.

The Taxpayer does not believe that at least two of the conditions to the share issue were met. Further, the business transaction required in order to secure the shares was terminated.

The Taxpayer resigned from the Company owing to other commitments. During the period after the Taxpayers' resignation from the Company, he discussed his interest with the same Company executive. That person advised the Taxpayer the shares would be allocated at some point in the future but he did not provide a time frame for their delivery.

The new Chairperson of the Company concluded the specific business transaction with the Taxpayer had not secured. The new Chairperson was granted shares in the company as a result.

The Taxpayer's representatives wrote the Company to renounce any interest that the Taxpayer may have held.

The Taxpayer is not, and has not previously been, listed as a shareholder of the Company on the ASIC register of shareholders.

The Taxpayer has not received any shareholder correspondence from the Company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 83A

Reasons for decision

Question 1

Does the interest in the Company granted to the Taxpayer constitute an award under an Employee Share Scheme (ESS) taxed under Division 83A of the Income Tax Assessment Act 1997 (ITAA1997)?

Application of Division 83A of the ITAA1997 is outlined in the general operative provisions under subdivision 83A-B. Sub-section 83A-20(1) of the ITAA 1997 provides the subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount. Subsections 83A-10(1) and (2) of the ITAA 1997 provide definitions of an ESS interest and an employee share scheme.

Pursuant to paragraph 83A-10(2)(a) of the ITAA 1997 an employee share scheme is defined as a scheme under which ESS interests in a company are provided to employees of that company. As a director and chairperson of the Company, the issue to be determined is whether the Taxpayer received an ESS interest under paragraph 83A-10(1)(a). This would require him to have a right to acquire a beneficial interest in a share in the Company.

Since neither the previous ESS legislation under former Division 13A of the Income Tax Assessment Act 1936 (ITAA1936) nor the current Division 83A of the ITAA1997 provide a definition or explanation of when a right is created, current case law is relied upon.

In Willis and Commissioner of Taxation [2010] AATA 420 the taxpayer argued that they acquired the right to options once a resolution approving their allotment was passed. However the court upheld the Commissioner's view that the right was not acquired until those options were actually created at issue. The current case seeks to establish whether a right to the shares was granted at all, and can be distinguished on its facts which lack any further action than a conditional Board resolution.

Commissioner of Taxation v McWilliam [2012] FCAFC 105 looked at when the taxpayer acquired a right to acquire shares, as well as the nature of what those rights were for the purposes of former Division 13A of the ITAA1936. The case involved a series of documented negotiations to secure the quantity and strike price of certain options as part of the taxpayer's employment arrangement. The agreement then entered into in July 2003 was unconditional as the taxpayer had an immediate, legally enforceable entitlement. The current case can be distinguished as the offer of a right to Company shares made to the Taxpayer was conditional on numerous factors occurring. Further, the Taxpayer's employment contract was for a specified sum annual sum without any opportunity for additional remuneration from shares or otherwise. The separate offer of a right to shares was subject to a conditional Board resolution which was left permanently un-actioned.

In Fowler v Commissioner of Taxation [2012] FCA 1040 (Fowler) at issue was when the taxpayer acquired the right to shares, in September when the taxpayer entered into a contract to acquire the options or in November when shareholders approved the grant of options. As provided in paragraph 110 of the decision:

"[e]ven if the directors were confident on 14 September 2006 that they would secure the approval of the shareholders at the annual general meeting later that year, the fact remained that the shareholders' determination as to whether or not to approve the options was a matter solely for the shareholders at the time of the meeting. The shareholders' giving or withholding of approval lay outside the control of the directors."

As such, the right was contingent and for the purposes of the employee share scheme provisions, it was held a taxpayer cannot acquire a right to shares when they remain conditional as to their grant.

Applying this case to the current circumstances, the Taxpayers right to acquire a beneficial interest in the Company was subject to four key conditions. Two of these conditions could not be met as the Taxpayer did not have access to any shares. The third condition was, to the Taxpayers knowledge never met. Also, owing to circumstances which occurred after the Taxpayer resigned as Chairperson, the fourth condition could never be met.

The Commissioner considers that, as decided in the case of Fowler, the Taxpayer cannot acquire a right to shares when they remain conditional as to their grant. The conditions attached to the right to shares in the Company were never, and could never, be fulfilled. As such the right to shares remained contingent. As a result the Taxpayer never acquired a right to the Company shares as per the definition of an ESS interest pursuant to section s83-10A and therefore Division 83-A is not applicable.

Question 2

If the interest is an ESS interest, will it be subject to tax and in which financial year?

The Commissioner does not consider the interest to be an ESS interest pursuant to section 83A-10 of the ITAA 1997 and therefore it will not be subject to tax under Division 83A of the ITAA 1997.

Question 3

Does the Taxpayers' interest in the company constitute income under any other relevant tax provisions?

The Taxpayer's right to acquire shares in the company was conditional on circumstances which can never be fulfilled. Therefore the right to acquire the shares will never be satisfied. As a result, no derivation of income can occur and no CGT asset was created.