Edited version of your private ruling

Authorisation Number: 1012469747880

Ruling

Subject: Employee share scheme - Cessation time - Selling restrictions

Question 1:

Does the imposition of the Employee Share Trust satisfy the requirements to defer the cessation time from the date of exercise of the options to the date of eventual withdrawal of shares from the Trust?

Answer:

Yes.

Question 2:

Is the cessation time the date the taxpayer exercises the options and obtains a beneficial interest in the shares?

Answer:

No.

Question 3:

Is the cessation time the date the taxpayer chooses to withdraw the shares from the share trust resulting in the shares being registered in the taxpayer's name?

Answer:

No.

Question 4:

Is the relevant assessable income calculated as the market value of the shares at the relevant cessation time less the amount paid to exercise the options?

Answer:

Yes.

This ruling applies for the following period<s>:

2011-12 income year

2012-13 income year

2013-14 income year

2014-15 income year

The scheme commences on:

The scheme has commenced.

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.

Background

The taxpayer is an Australian resident individual taxpayer.

At all material times, the taxpayer was, and remains, a permanent full-time employee of an Australian public company listed on the Australian Stock Exchange (hereinafter referred to as 'the Company').

The Company maintains an Employee Share Scheme for the benefit of selected senior employees.

The taxpayer accepted an invitation to participate in the Company's Employee Share Option Plan.

The taxpayer subsequently exercised options granted to them and holds the beneficial interest to shares issued by the Company.

The taxpayer requires clarification relating to:

a. the effective date the taxpayer received a benefit; and

b. the taxable value of the benefit received.

Grant of Options

For some years, the Company has maintained an Employee Share Scheme.

About five years ago, the Company updated the terms and conditions of its Employee Share Option Plan to enable "the issue to Eligible Employees of Options to acquire fully paid ordinary shares in the Company' subject to the terms and conditions of the plan.

About four years ago, the taxpayer was granted some options (a copy of the grant letter and option certificates were provided). The price paid for the grant of the options was $nil.

The weighted average share price at the date of grant, as advised by the Company, was about $X.

The options granted were divided into specified parcels and exercisable annually commencing about two years after the date of grant.

The price per share to be paid for the exercise of the options was listed as half the market value as at the date of grant (provided the discretionary performance discount was not waived).

A vesting schedule and the expiry dates were provided.

The taxpayer was fully briefed on the taxation implications of the granting of the options and chose to not make a Section 139E election to be taxed up-front in the year of grant. Therefore, no amount was included as assessable income in the taxpayer's Income Tax Return for that year.

Subsequently, the Company amended the terms and conditions of its Employee Share Option Plan by incorporating provisions to allow for the shares issued upon exercise of employee options to be held in a Share Trust.

A copy of the revised terns and conditions of the Employee Share Option Plan was provided.

Later, the Company produced a supplementary document providing guidance to employees in relation to possible taxation implications relating to the Employee Share Option Plan.

A copy of the supplementary Employee Share Option Plan Australian Taxation Summary was provided.

Shortly afterwards, the Company provided a letter to the taxpayer explaining changes made to the Employee Share Option Plan.

Exercise of Options

At the first vesting date, the taxpayer gave notice to the Company of their intention to exercise the newly vested options as per the original grant. The instructions to the Company stipulated that the shares be issued in the name of the taxpayer.

The price paid for the exercise of this first parcel of options was the amount mentioned above.

The market value of the shares determined by the closing price quoted on the Australian Slack Exchange at the exercise date was higher than the market value when the options were granted.

The taxpayer determined that the exercise of the options gave rise to a taxable event.

The taxpayer included the calculated amount as assessable income in 20ZZ Income Tax Return.

Interposed Share Trust

Pursuant to a Clause in the Employee Share Option Plan, the Company will in its absolute discretion issue shares either to the relevant employee or to the Trustee of the Employee Share Trust established as part of the Employee Share Option Plan.

Pursuant to another Clause of the Employee Share Option Plan, the beneficial interest in the issued shares is held by the Trustee on behalf of the employee until the shares are withdrawn from the Trust. There are no qualifying conditions for release of the shares from the Trust other than completion of a Withdrawal Notice and the approval of the Company's Board.

The taxpayer, believing that they were the beneficial owner of the shares issued, has declared in their 20ZZ Income Tax Return that the relevant cessation event was the date of exercise of the options.

The taxpayer has subsequently become aware that the shares issued as a result of the exercise of the options were not registered in their name but rather have been registered by the Company in the name of the Trustee, notwithstanding that the taxpayer's notice of exercise of options directed that the shares be registered in the taxpayer's name.

A distribution statement from the trustee for the Employee Share Trust confirms that the shares are registered in the name of the Trust. A copy of the distribution statement was provided.

Certain documents provided with the application are to be read with, and form part of the description of the scheme for the purpose of this ruling.

Assumptions

For the purpose of this ruling, a Withdrawal Notice will be submitted and the shares will be released from the Employee Share Trust:

· during the ruling period, and

· before any termination of your employment with the Company, and

· before the tenth anniversary of the grant of the options.

For the purpose of this ruling, the shares withdrawn from the Employee Share Trust will not be sold within 30 days of the withdrawal date.

For the purpose of this ruling, the market value of the Company's shares on the withdrawal date will be greater than the exercise price of the options.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A of Part III,

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Section 104-25,

Income Tax Assessment Act 1997 Section 134-1 and

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

Reasons for decision

Question 1

Summary

The imposition of the Employee Share Trust satisfies the requirements to defer the cessation time from the date of exercise of the options to the date of eventual withdrawal of shares from the Trust.

Detailed reasoning

The options provide the taxpayer with the right to acquire shares. Therefore, they are rights to acquire shares for the purpose of Division 13A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).

Division 13A of Part III of the ITAA 1936 applies for the income year in which the options were granted to determine:

· whether the options were granted under an employee share scheme

· if so, whether any amount is assessable in the grant year, and

· if so, how much is assessable in the grant year.

Subsection 139B(1) of the ITAA 1936 provides that any discount the taxpayer receives in relation to a right that he acquires under an employee share scheme is included in his assessable income.

Subsection 139C(1) of the ITAA 1936 provides that the taxpayer acquires a right under an employee share scheme if they acquire it in respect of, or for or in relation directly or indirectly to any employment of his. Subsection 139C(3) of the ITAA 1936 provides that a right is only acquired under an employee share scheme if they acquire it at a discount to its market value.

We have concluded that the options were granted to the taxpayer under an employee share scheme as they clearly form part of his remuneration package and so relate to their employment.

We have also concluded that the options were granted at a discount because of the relationship between the exercise price, the exercise period and the market value of the underlying shares at that time.

Subsection 139B(2) of the ITAA 1936 provides that any discount that the taxpayer receives due to the grant of rights under an employee share scheme is included in their assessable income in the year of grant unless the rights are qualifying rights and they do not choose to be assessable in the year of grant.

Section 139CD of the ITAA 1936 provides that rights in a company are qualifying rights if five conditions are met. The conditions are:

· The rights are granted under an employee share scheme

· The rights are granted in a company that is the taxpayer's employer, or a holding company of their employer

· The rights are rights to acquire ordinary shares

· The taxpayer does not hold a legal or beneficial interest in more than 5% of the shares in the company, and

· The taxpayer is not in a position to cast or control the casting of more than 5% of the maximum number of votes that might be cast at a general meeting of the company.

We accept that all five of the abovementioned conditions have been met.

The taxpayer chooses to include the discount on qualifying rights in their assessable income in the year of grant by making an election under section 139E of the ITAA 1936.

The taxpayer has not elected to be taxed in the grant year.

Subsection 139B(3) of the ITAA 1936 provides that any discount that the taxpayer receives due to the grant of rights under an employee share scheme is assessable in the year that the cessation time occurs if they are qualifying rights but the taxpayer doesn't choose to be assessable in the year of grant.

Subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when the taxpayer disposes of the right (other than by exercising it)

· The time when the taxpayer's employment with a relevant employer ceases

· The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

· If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

· 10 years from the date of grant of the right.

None of these occurred before 30 June 2009.

Paragraph 83A-5(2)(a) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) provides that Subdivision 83A-C of the Income Tax Assessment Act 1997 (ITAA 1997) applies where:

· Rights were granted under an employee share scheme before 1 July 2009

· The rights were to be assessable in the year that the cessation time occurs, and

· The cessation time did not occur before 1 July 2009.

Each of these conditions is satisfied.

Subsection 83A-110(1) of the ITAA 1997 provides that the taxpayer's assessable income for the year that the deferred taxing point occurs includes the market value (calculated at the deferred taxing point) of shares that he acquired by exercising rights that were granted to them under an employee share scheme reduced by their cost base. (The cost base will include the exercise price.)

Paragraph 83A-5(4)(b) of the ITTPA ensures that the ESS deferred taxing point is determined using the cessation time from Division 13A of Part III of the ITAA 1936 (see the reference to subsection 139CB of the ITAA 1936 above).

As stated above, subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when the taxpayer dispose of the right (other than by exercising it)

· The time when the taxpayer's employment with a relevant employer ceases

· The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

· If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

· 10 years from the date of grant of the right.

The exercise of the options happened first, but the resulting shares were allocated to the Employee Share Trust. There are additional requirements to be met before the shares can be sold or transferred into the taxpayer's name. These constitute selling restrictions that prevent the exercise of the options from being a possible cessation time for the following reasons:

· A Withdrawal Notice is required to be completed before the shares can be released from the Trust

· The approval of the Company's Board is also required before the shares can be released from the Trust

· The Company's Board is not obligated to approve any withdrawal request, and

· There is at least one identified instance where the Company's Board may decline to approve a withdrawal request.

For the purpose of this ruling, the lodgement of the Withdrawal Notice and release of the shares into the taxpayer's name will happen next as the selling restrictions will end at this time. In the circumstances of this case, the cessation time will happen when the Company's Board approves the release of the shares from the Trust.

Question 2

Summary

The cessation time is not the date the taxpayer exercises the options and obtains a beneficial interest in the shares.

Detailed reasoning

Subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when the taxpayer disposes of the right (other than by exercising it)

· The time when the taxpayer's employment with a relevant employer ceases

· The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

· If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

· 10 years from the date of grant of the right.

The exercise of the options could only be the cessation time if there were no selling restrictions or forfeiture conditions on the shares acquired by exercising the rights.

The allocation of the shares to the Employee Share Trust together with the Withdrawal Notice requirements and approval requirements constitute selling restrictions that prevent the exercise of the options from being a possible cessation time.

The selling restrictions will continue until the Company's Board approves the release of the shares from the Trust.

Question 3

Summary

The cessation time is not the date the taxpayer chooses to withdraw the shares from the share trust resulting in the shares being registered in the taxpayer's name.

Detailed reasoning

Subsection 139CB(1) of the ITAA 1936 defines the cessation time of a right as the earliest of:

· The time when the taxpayer disposes of the right (other than by exercising it)

· The time when the taxpayer's employment with a relevant employer ceases

· The later of the time when any selling restrictions end and any forfeiture conditions cease on any share acquired by exercising the right

· If there are no selling restrictions or forfeiture conditions on the share acquired by exercising the right - when the right is exercised, and

· 10 years from the date of grant of the right.

The selling restrictions do not end on lodgement of a Withdrawal Notice with the Trust as the Company's Board has the right to decline to approve it.

Therefore, the selling restrictions will continue until the Company's Board approves the release of the shares from the Trust.

Question 4

Summary

The relevant assessable income amount is calculated as the market value of the shares at the relevant cessation time less the amount paid to exercise the options.

Detailed reasoning

Subsection 83A-110(1) of the ITAA 1997 states that the assessable income for the income year in which the ESS deferred taxing point for the ESS interest occurs includes the market value of the interest at the ESS deferred taxing point, reduced by the cost base of the interest.

The ESS interest that the taxpayer will hold at the deferred taxing point (being the cessation time) is the shares.

The cost base of the shares is worked out using the capital gains provisions. For shares acquired as a result of the exercise of options, the cost base is the sum of the cost base of the options and the exercise price.

The cost base of the options is $nil as the taxpayer paid nothing for them and they were never subject to modification (as they were exercised before Division 83A of the ITAA 1997 could apply to them).

As the cost base of the options is $nil, the amount of the assessable income due to withdrawing the shares from the Employee Share Trust will be their market value calculated at that time less the exercise price.

Note: CGT event C2 happens to the options when they are exercised, but any capital gain or capital loss is disregarded when the cost base of the options is folded into the cost base of the newly acquired shares.